The Indian government has finally paved the way for the entry of global retail giants into India. Foreign direct investment (FDI) of up to 51 per cent has been allowed in multi-brand retail. Simultaneously, the FDI limit in single-brand retail ventures has been increased to 100 per cent; the government had in February 2006 permitted 51 per cent FDI in single-brand retail.
The clearance comes with several riders; multi-brand foreign retailers need to make a minimum investment of $100 million in the country. They would be allowed to set up shop only in cities with a population of more than 10 lakh as per the 2011 Census; there are about 55 such cities so it means big retail chains can move beyond the metros to smaller cities. Foreign investors will be required to put up 50 per cent of total FDI in back-end infrastructure. Such infrastructure will include capital expenditure on all activities, excluding that on front-end units. Expenditure on land cost and rentals will not be counted for purpose of back-end infrastructure. Retailers will need to source at least 30 per cent of manufactured/processed products from small industries. However, there will not be any obligation on the part of retailers to source agricultural produce such as fruit and vegetables. The Government has also retained the first right on sourcing agricultural produce. In terms of single-brand retail, just one important condition has been added to the existing one. It makes 30 per cent sourcing from small and medium enterprises mandatory, as soon as the FDI limit exceeds 51 percent.
The Government believes opening up of FDI in multi-brand retail trade and further liberalisation of single-brand retail trade will facilitate greater FDI inflows besides additional and quality employment. It is being assumed that it would make eminent commercial sense for the retailers to source fresh produce locally. It is unlikely that retailers would undertake large-scale imports of agricultural products. It will also bring a lot of benefits to the consumers and farmers in terms of quality, price and removal of inefficiencies in the agricultural sector. The Government has maintained that farmers will get higher remuneration and FDI will help in the development of much needed logistics and cold chains in the country. All sections of Indian industry of course have welcomed the move as any such investment spurs up industrial activity.
Global chains may face problems in opening stores in 28 of the 53 cities which have been thrown open to retailers. A long deliberation had been keeping the decision on hold as political opposition as well as store owners voiced their concerns on the fate of the small retailers once global giants like Walmart, Carrefour and TESCO open stores next doors. However, there doesn’t seem to be much reason for such extreme concern. The Indian consumer is a quirky brand itself; after the initial excitement dies down most consumers may remain loyal to their very own corner store. We have seen brands like Spencer’s close shop in localities where thriving traditional shops existed, even in more elite localities in metros. Street fashion shops continue to be crowded despite the opening up of several clothes retailers in the metros. Given the large scope and size in the retailing business in India there is every possibility that both parties face initial difficulties but eventually gain some mutual benefits.