Multi-brand retail liberalisation unlikely in near future

Author: | Published: 1 Aug 2012
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In December 2011, the Government of India (GOI) approved 100% foreign direct investment (FDI) in single-brand retailing. The proposal to allow up to 51% FDI in multi-brand retailing, however, was put on hold. This decision has discouraged those investors wishing to invest in the multi-brand sector, which they consider to be potentially one of the most important investment spaces in India if liberalised. Legal practitioners are not optimistic that the matter will be resolved this year.

The GOI decision to raise FDI levels for single-brand retail, from 51% to 100%, was favourable towards some of the largest single-brand retailers in the world. For example, Ikea, which had been waiting for the GOI to formalise its decision, was given the green light to start its operations in India. Meanwhile, other foreign single-brand retailers, such as Marks & Spencer, were not keen to untie their current joint ventures with local partners. These retailers had benefited from the local expertise of their partners and were happy with the 51% share that they held, which gave them the right to pass ordinary resolutions.

On the other hand, the GOI's decision to place on hold its proposal to permit up to 51% FDI in multi-brand retailing in India has discouraged foreign multi-brand retailers, which have long waited for the GOI's approval to realise their business plans.

India's high GDP and high consumption growth has made it a favourable investment destination for foreign retail businesses. Multi-brand retailers, such as Walmart and Carrefour, have long been keen to enter the front-end multi-brand retailing sector in India.

Since April 2011, the Department of Industrial Policy and Promotion (DIPP) has been pushing to liberalise the retail industry in India with the intention of improving retail infrastructure and introducing competition to the sector. In a discussion paper released by the DIPP, it was reported that Rs 1 trillion worth of fresh produce is wasted in India due to a lack of supply chain infrastructure. In addition, a 2011-2012 economic survey, released on March 15 2012, said that introducing foreign competition with the cap at a lower level would incentivise India's currently disorganised retail sector to modernise. The introduction of FDI in multi-brand retail could also have the benefit of addressing the high rates of food inflation and low revenue obtained by Indian farmers.

India has a retail market with an estimated size of US$590 billion. However, from December 2007 to December 2011, only 60 proposals to invest in India via the 51% route in single retailing were accepted. These amounted to a total of only US$137 million.

Legal practitioners and industry commentators say that the reluctance of domestic players to embrace competition is the major obstacle to liberalisation being realised in India. Rajiv Bakshi, vice president of legal at Godrej Consumer Goods, says: "There are too many misconceptions surrounding this issue. Domestic retail storeowners are afraid that the foreign-funded multi-brand retail stores are going to divert their business sources away. But, in fact, the market for both domestic traders and foreign traders is expanding."

But liberalisation does not have to be disadvantageous to local operators, adds Bakshi. "It would not affect our businesses," he says. "In fact, more competition would be good for consumers and retailers in the long-run. It drives the whole industry to improve the quality of both services and goods."

Politicians are worried that if FDI is allowed in multi-brand retail, farmers and small-scale retailers will be forced to sell their produce at cheaper prices because of large procurement. The public also worries about the potential for job losses if retailers need to cut costs in order to compete with foreign retailers.

To overcome some of these concerns, the GOI has already set out some conditions for making approvals in its proposal on liberalising multi-brand retailing. For example, it is stated in the proposal that at least 50% of total FDI will be invested in 'back-end infrastructure', which will include processing, manufacturing, distribution, design improvement, quality control, packaging, warehouses, storage, logistics and related infrastructure. Some 30% of procurement of manufactured or processed products shall be sourced from small industries that are less than US$1 million in value. Finally, retail sales locations will be set up in cities with populations of more than one million people.

These guidelines are set to ensure that foreign-brand retailers will invest in improving India's supply chain infrastructure as well as preventing them from operating together with the smaller retailers in less populated areas, which are susceptible to competition. Despite these initiatives, the public still appears to be reluctant on the issue.

Bakshi says that it is very unlikely that the proposal to allow FDI in multi-brand retail will be approved in 2012/ 2013. "At the moment, the GOI has been so slow in collaborating with the stakeholders. There is too much adverse publicity against the proposal. Constant protests were staged because labourers were afraid that the decision might lose them their jobs. The GOI was also unable to collaborate with political parties even after a very long period of discussion. This makes it even harder for the public to accept the proposal."

Abhijit Joshi, CEO of AZB & Partners, concludes: "In the near future, it is likely that the GOI is going to keep on proposing the same thing. But, it is not going to be approved if things go the same way as now."

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