Retail FDI - A bold signal

FDI in retail's implementation will be challenging.
Retail FDI - A bold signal

The political opposition has not completely died down but the Government has shown the intent to weather the storm and push through the reforms on FDI in retail.  The move by the Government sent out  a strong signal that the retail industry had been waiting for and more importantly a positive message to domestic and international businesses about the Government’s intent.  Fundamentally, Indian retail has a very positive outlook in the medium to long term, considering the demographics and changing consumption patterns – it will clearly outperform most other international markets and this policy allows a foot in the door for modern retail concepts to get a share of the pie.

The initial reaction from retailers has been to welcome the policy, but they are likely to be measured in their actions.  While the opportunity stares in the face but the implementation challenges are quite stiff as several of the domestic retailers have learnt in the last few years. 

Single brand retail is the immediate beneficiary – the Government has considered representations from international retailers and eased some of the prohibitory clauses such as making the 30 percent sourcing norm from MSMEs preferable and easing the restriction on ownership of brand.  This will lead to some investment in the short to medium term with new single brand retailers looking to establish operations and more importantly some of the existing names who are present in India through franchisee or joint venture partners will look to increase their stake.  Some have argued that the Governmentbuckled down to international pressure, but the changes are very reasonable – else what was the point of allowing 100 percent FDI in single-brand if the stiff conditions precluded any investment. 

Implementation of the multi-brand policy is clearly more complex and will require retailers to develop appropriate business models that conform to the current restrictions around state permissions but are flexible and scalable to adapt to more states permitting such retailers in future and the unforeseen risk of some states rolling back the permission in the event of a change in their political leadership.  A likely option is to develop separate legal entities for each state but that creates a very complex and potentially inefficient operating structure.  A significant portion of the investment is meant to develop the supply chain and intermediaries which is the biggest inefficiency in our current retail network. Sourcing 30 percent from MSMEs is mandatory for multi-brand and will require developing and nurturing suppliers. 

In the short-term we are likely to see some developments as international players seek to find appropriate partners in India and some of the pre-announced alliances convert to real joint ventures, but it will be atleast 2 to 3 years before we can have any substantial investments flowing in.

The multi-brand policy is focused on large food and grocery retailers but completely ignores non-food retailing such as pharmacy and lifestyle, consumer durables, books, departmental stores etc.  Most of these categories are like single brand retailers where 30 percent sourcing from MSMEs is not practical and also there is no imminent threat to kirana stores.  The Government could have considered a more liberal   policy towards these and eased norms in line with single-brand.

Finally, a word about e-commerce companies, a fledgling sector that is still learning the ropes could have benefitted from the experience of international players but they had to be precluded from the policy given the practical limitation of implementing state permissions. 

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