FDI in multibrand retail, the next big thing

The Economic Survey for 2010-11 has proposed that foreign direct investment be allowed in multi-brand retailing, but in a phased manner.
FDI in multi brand retail

While FDI in cash and carry wholesale trading is permitted in India, FDI in multi-brand retailing is prohibited. FDI in singlebrand retailing is up to 51%, and allowed since 2006. During the period April 2006 to March 2010, FDI inflows valued at USD 194.69 million have come into this sector, accounting for 0.21% of total FDI inflows during this period.

Industry's take
Retail giant Wal-Mart is open to forge a relationship with any Indian retailer for its front-end operations only if, foreign direct investment in multi-brand retail is allowed.

Raj Jain, CEO of Bharti Walmart, shares, “I think it’s a very good endorsement by sections of the government on why retail should be opened and I am hopeful that government will move forward on it".

Wal-Mart says even a 51% limit will come as good news, as it is an indication that more opening up is indeed possible. The US retailer believes it can make billions of dollars in sales if the sector is opened up and this could make India as big a market as China. While the current joint venture between Bharti retail and Wal-Mart is on track, there is a possibility of more tie-ups in the future.

“If the law changes in the country and FDI in retail is out, we will evaluate any relationship which is possible,” added Jain.

The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (“DIPP”) is, about to approach the cabinet secretariat with a roadmap for permitting Foreign Direct Investment (“FDI”) in multi-brand retail. Given the sensitivity, intense debate and difference of opinion on the issue of permitting FDI in multi-brand retail, the DIPP is expected to advocate liberalisation of the sector in a stepwise manner. To start with, the DIPP is expected to propose that:

•    FDI in multi-brand retail be limited to a maximum of 51%
•    Minimum FDI in any multi-brand retail venture should be USD 100 million
•    50% of the FDI in any multi-brand venture be invested and deployed in development of back end infrastructure
•    Multi-brand retailers be required to source at least 30% of their products, including food items, from small and medium scale enterprises
•    Multi-brand retailers also be required to sell at least 30% of their products to small retailers
•    Post FDI, multi-brand retailers file periodic statements and reports with the Government showing compliance with the prescribed conditions
•    The number of outlets in big cities be capped and
•    The State Governments to have a final say in whether or not to permit FDI funded multi-brand retail outfits in their respective state(s).

Benefit prices and tackle inflation

The inter-ministerial group (IMG) on inflation, set up by the prime minister, has also given its blessings, saying FDI in multi-brand retail will help control rising prices and reducing inflation.

Planning Commission deputy chairman Montek Singh Ahluwalia spoke in favour of opening up the multi-brand retail sector to foreign direct investment (FDI), saying it will benefit farmers and also help contain food inflation.

Benefit farmers

The Planning Commission supports FDI in (multi-brand) retail. Farmers will benefit from modern retail marketing. No doubt that modern retail marketing is good.

The commerce ministry -- which is responsible for FDI policy -- recently floated a concept paper on permitting foreign investment in the politically sensitive multi-brand retail sector.

At present, 51 per cent FDI is permitted in single brand retail, while 100 per cent is allowed in the wholesale cash-and-carry segment.

Less wastage

As per government estimates, India sees wastage of perishable food and vegetable items worth Rs 1 lakh crore annually due to the lack of proper storage and food processing facilities.

Left parties and trade unions believe the rise in prices of food articles is mainly due to futures trading in agri-commodities and have asked the government to completely ban the practice.

Multi brand FDI will tackle wastage/create jobs

FDI in retail will bring development of back-end infrastructure like processing plants and cold storages to augment farmers' income. "When value will be added, jobs will be created."

The entire process will add value in the post-harvest food management and lead to creation of jobs in rural areas. At present, India is the second largest producer of fruits and vegetables in the world. But, 35% of the production goes to waste because of inadequate processing and cold-storage facilities. Opening up of the sector will bring efficiency, which will help both the consumer as well as the producer.

 He added that the discussion paper has outlined a scenario to promote investment in the rural sector. It has been proposed that at least 50% of the jobs in the retail outlets should be reserved for the rural youth.

The release of the discussion paper is aimed at inviting views from various stakeholders, which will help remove several apprehensions about allowing FDI in the multi-brand retail sector. Retail segment is growing fast in the country with increase in the size of the middle class. As the economy is growing fast, disposable income of the middle-income group is also growing. So, expansion of the multi-brand organised retail sector in the country will not affect the local retail shops.

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