FDI in Retail: A Necessary Evil: Civil Services Mentor Magazine October 2012

FDI in Retail: A Necessary Evil

The Union cabinet on 24 November 2011 approved 51 per cent
foreign direct investment (FDI) in multi-brand retail. The Cabinet also decided
to raise the cap on foreign investment in single-brand retailing to 100 per cent
from 51 per cent. An estimated Rs 30-lakh-crore retail sector was thus opened to
foreign investors by clearing a bill that allows 51 per cent investment in
multi-brand retail. The decision being perceived as game-changer for the
estimated USD 590 billion (Rs 29.50 lakh crore) retail market was taken at the
meeting of the Cabinet presided over by Prime Minister Manmohan Singh.

India currently allows 51  percent foreign investment in
single brand retailers and 100 percent for wholesale operations but no FDI in
multi-brand retail.

The major provisions for FDI investment include that the
minimum investment will have to be $100 million. Retail stores will only be
allowed in cities with more than one million people. Also it will be mandatory
for retailers to source a minimum 30 per cent of the value of manufactured
goods, barring food products, from small and medium enterprises. Investment up
to 50 per cent will have to be in storage and back-end infrastructure. India
being a signatory to World Trade Organisation’s General Agreement on Trade in
Services, which include wholesale and retailing services, had to open up the
retail trade sector to foreign investment. There were initial reservations
towards opening up of retail sector arising from fear of job losses, procurement
from international market, competition and loss of entrepreneurial
opportunities. FDI in cash and carry or wholesale trade, was allowed way back in
1997 during the United Front Government. Foreign investment of up to 51 per cent
in single brand retailing came to India in January 2006.

The Union government further asserted that 30 per cent
sourcing under FDI in multi-brand retail has been made mandatory from Indian
MSEs only. The government highlighted that the 30 per cent obligation before the
global players is limited to India. The government’s explanation came amidst
protests from the opposition and the micro and small enterprises (MSEs).According
to government’s previous stand, the overseas players have to do 30 per cent of
their sourcing from MSEs which, however, can be done from anywhere in the world
and is not India-specific. The only condition placed was that these MSEs must
not have more than $1 million [Rs.5 crore] investment in plant and machinery.

In 2004, The High Court of Delhi defined the term ‘retail’ as
a sale for final consumption in contrast to a sale for further sale or
processing (i.e. wholesale), A sale to the ultimate  consumer. Thus,
retailing can be said to be the interface between the producer and the
individual consumer buying for personal consumption. This excludes direct
interface between the manufacturer and institutional buyers such as the
government and other bulk customers Retailing is the last link that connects the
individual consumer with the manufacturing and distribution chain. A retailer is
involved in the act of selling goods to the individual consumer at a margin of

The retail industry is mainly divided into:- 1) Organised and
2) Unorganised Retailing Organised retailing refers to trading activities
undertaken by licensed retailers, that is, those who are registered for sales
tax, income tax, etc. These include the corporate-backed hypermarkets and retail
chains, and also the privately owned large retail businesses. Unorganised
retailing, on the other hand, refers to the traditional formats of low-cost
retailing, for example, the local kirana shops, owner manned general stores,
paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. The
Indian retail sector is highly fragmented with 97 per cent of its business being
run by the unorganized retailers. The organized retail however is at a very
nascent stage. The sector is the largest source of employment after agriculture,
and has deep penetration into rural India generating more than 10 per cent of
India’s GDP.

For those brands which adopt the franchising route as a
matter of policy, the current FDI Policy will not make any difference. They
would have preferred that the Government liberalize rules for maximizing their
royalty and franchise fees. They must still rely on innovative structuring of
franchise arrangements to maximize their returns. Consumer durable majors such
as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to
shift from the preferred route right away. For those companies which choose to
adopt the route of 51% partnership, they must tie up with a local partner. The
key is finding a partner which is reliable and who can also teach a trick or two
about the domestic market and the Indian consumer.

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