FDI in Multi-Brand Retail in India- A larger pie or a scrunched nut

Posted in Finance Articles, Total Reads: 14738 , Published on 01 November 2011
Advertisements

Henry Ford, the genius inventor once famous said,"Don't find fault, find a remedy”. This adage reverberates ever so relevantly in today’s Indian retail sector scenario like never before. India, over the latter half of the previous decade, has been one of the most sought after destinations for investors across the globe. The retail sector in particular has been one of the sectors where there has been a constant buzz and excitement surrounding government policy shaping the sector.

The Indian retail sector has predominantly comprised of  unorganised players in the form of locally owned, Mom and Pop stores or the ‘kirana’ stores as they are known in common parlance, single owner general stores, paanshops, convenience stores, hand cart and pavement vendors, etc.On the other hand, organised retailing involves trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. basically involving the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

However, the tremendous growth prospect of the sector coupled with successfully established models of organised retail in other Asian markets such as China has paved the way for the establishment of organised retail in India as well. In addition to this, a number of home-grown corporate giants such as Future Group and Aditya Birla retail have furthered the cause of organised retail by setting up exclusive outlets across India. Nevertheless, there is still a long way to go before Foreign Direct Investment (FDI) in Indian Retail can be realised in its entirety.

The Indian retail is a robust pillar of the economy with a 13% contribution to the GDP and employs 6% of the nation’s workforce.According to India Brand Equity Foundation (IBEF), the Indian retail is valued at about US$ 450 billion, expected to grow by 10.2% in 2011-12. Of this, organised retail onlyforms 6.5% of the pie. Hence, there is enormous scope for expansion through infrastructure and investment support. Furthermore, while unorganised retail has been pegged at a rate of 6% annually, organised retail has been booming at a stupendous growth rate of 35%. In fact, it is expected to reach 16-18% of the total market within the next five years.

A recent A.T.Kearney annual Global Retail Development Index (GRDI) confirmed India as the most attractive market for retail investment for a third consecutive year. Despite this, the entry for global retail giants in the form of FDI’s has remained more or less restricted and the government has maintained a tight leash over the FDI policy in retail, primarily owing to perceived threat posed by organised retailers on the small scale kirana shop owners.

At present, India’s FDI policy in retail provides for the following guidelines, as issued by the Department of Industrial Policy and Promotion (DIPP):

  • FDI up to 100% is allowed for cash and carry wholesale trading and export trading under the automatic route.
  • FDI up to 51% with prior Government approval (FIPB route) for retail trade of Single Brand products, permitted from 2006 onwards.
  • FDI is not permitted for multi-brand retail in India.

The term “Single Brand” has not been specifically defined by the government anywhere although the press note 3 released by DIPP in 2006 provides a few guidelines:

  1. Only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed)
  2. Products should be sold under the same brand internationally
  3. Single-brand product retail would only cover products which are branded during manufacturing
  4. Any addition to product categories to be sold under “single-brand” would require fresh approval from the government.

Despite these guidelines, there has been plenty of ambiguity regarding the classification of single brands in case of sub-brands and co-branded products and consequently, whether or not these would come under the ambit of the FDI norm of 51% FDI for ”Single” brands.


Though the voices have been growing louder for Multi-Brand FDI to be permitted for retail, there is still a long way to go before all the pieces of the jigsaw are put together. For the moment though, the Indian government aims to take up this case gradually as suggested by the 2010-11 Economic Survey report which states“Permitting FDI (foreign direct investment) inretail in a phased manner beginning with metros and incentivizing theexisting retail shops to modernize could help address the concerns offarmers and consumers. FDI in retail may also help bring in technicalknow-how to set up efficient supply chains which could act as models of development."

There are a multitude of reasons being floated around to prevent the liberalisation of the FDI norms for Indian retail:

  • Primary among these is the concern regarding the kirana stores as well other locally operated Mom and Pop stores being adversely affected by the entry of global retail giants such as Walmart, Carrefour and Tesco. As these brands would come with advanced capabilities of scale and infrastructure in addition to having deep pockets, it is argued that this would result in the loss of jobs for lakhs of people absorbed in the unorganised sector.
  • There has also been a debate over the kind of employment that would be generated as it is assumed that semi-skilled people would not be absorbed into the system. As majority of the workforce in India falls in this category, doubts have been parlayed about the value that would be generated by opening up the sector.
  • Fears have also been raised over the lowering of prices of products owing to better operational efficiencies of the organised players that would affect the profit margins of the unorganised players.
  • Instability surrounding the political arena with a number of scams of varying magnitudes doing the rounds has also led to a sense of uncertainty among foreign investors.

ManyIndustry experts though, feel that the reservations against the introduction of Multi-Brand retail are mostly misplaced. The successful deployment of 100%FDI in China is a case in point.Partial FDI in retail was introduced in 1992 in China. Subsequently, in December 2004, the Chinese retail market was fully opened up to utilise the enormous manpower and wide customer base available that has led to a rapid growth of the sector. Today, its retail sector is the second largest (in value) in the world with global retailers such as Walmart, 7-Eleven and Carrefour comprising 10% of the total merchandise.

Multi-brand retail, if allowed, is expected to transform the retail landscape in a significant way:

  • Firstly, the organised players would bring in the much needed investment that would spur the further growth of the sector. This would be particularly important for sustenance of some of the domestic retailers that don’t have the resources to ride out the storm during an economic slump such as the case with Vishal, Subhikshaand Koutons, which couldn’t arrange for funds to sustain their growth.
  • The technical know-how, global best practices, quality standards and cost competitiveness brought forth through FDI would augur well for the domestic players to garner the necessary support to sustain their growth.
  • Indian has also been crippled by rising inflation rates that have refused to come within accepted levels. A key reason for this has been attributed to the vastly avoidable supply chain costs in the Indian food and grocery sales which has been estimated to be a whopping US$ 24 Bn. The infrastructure support extended to improve the backend processes of the supply chain would enable to eliminate such wastages and enhance the operational efficiency.
  • FDI in multi-brand retail would in no way endanger the jobs of people employed in the unorganised retail sector. On the contrary, it would lead to the creation of millions of jobs as massive infrastructure capabilities would be needed to cater to the changing lifestyle needs of the urban Indian who is keen on allocating the disposable income towards organised retailing in addition to the local kirana stores. Thesestores would be able to retain their importance owing to their unique characteristics of convenience, proximity and skills in retaining customers. Also, these would be more prominent in the Tier-II and Tier-III cities where the organised supermarkets would find it harder to establish themselves.
  • The numerous intermediaries would be restricted and therefore, the farmers would get to enjoy a bigger share of the pie.

FDI in multi-brand retail is therefore a necessary step that needs to be taken to propel further growth in the sector. This would not only prove to be fruitful for the economy as a whole but will also integrate the Indian retail sector with the global retail market.It is not a question of ‘how’ it will be done but ‘when’.

**Added 20-09-2012

Amidst opposition from its own allies, government went ahead implementing its decision to allow FDI in multi-brand retail.  Under the notification relating to FDI in multi-brand retail, multinational companies can invest up to 51 per cent to open stores in 10 states and UTs which have so far agreed to implement the decision. The decision to allow Multibrand retailers to open stores rests with the state governments.

Minimum amount to be brought in by the foreign investor would be $100 million and outlets may be set up only in cities with a population of more than 10 lakh.

India Inc hailed the government’s decision to implement FDI in multi brand retail and voiced that it will give a strong message to investors that the government means business and stands firm on its initiatives. This decision is a right step and will go a long way in capital infusion and is expected to strengthen the farmer’s community.

References:

  1. FDI in Multi-brand Retail: The Next Big Thing in Reforms, but Roadblocks Persist: India Knowledge@Wharton
  2. Retailing in India, Wikipedia
  3. Foreign Direct Investment in Indian Retail Sector – An Analysis: Pulkit Agarwal, Isha Tyagi
  4. FDI in Retailing – Is it the need of the hour: L.Dhamayanthi, S.Pradeep Kumar
  5. Businessgyan.com – Single Brand Retail by Tomu Francis
  6. Moneycontrol.com – Supermarket FDI Plan moving very fast
This article has een authored by K.S.G Tarun from IMT Gaziabad




Advertisements


If you are interested in writing articles for us, Submit Here