FDI in Retail - A bold move by Indian Government

Overview

In a bold and in all likelihood, a controversial step, the Union Cabinet has finally permitted 51% FDI in Multi-Brand Retail Trade (MBRT) and up to 100% FDI in Single Brand Retail Trade (SBRT) both with Government approval. The existing policy prohibits FDI in MBRT and limited FDI in SBRT to 51%.

The Department of Industrial Policy and Promotion (DIPP) had circulated a draft note to seek inter-ministerial and public views on this politically sensitive issue. Some of the key features of the policy liberalization as stated by the government note are as follows:

MBRT - 51% under approval route (prohibited presently)

The proposal for 51% FDI in MBRT has been permitted under Government Approval route with the following riders:

• Fresh agricultural produce and meat products may be unbranded. The Government has the first right to procure agricultural products. Given that there are significant losses due to poor storage facilities for produce acquired by the Government, this may be a precautionary condition in order to ensure food security;
• Minimum FDI to be brought in is USD100 million. It is important to note that the period over which this amount is to be brought in has not been specified;
• At least 50% of the total FDI must be invested in ‘backend infrastructure’
• The term ‘Back-end infrastructure’ has been defined to include capital expenditure on all activities, excluding that on front-end units; for instance, it will include investment made towards processing, manufacturing, distribution, design improvement, quality control and packaging, amongst others. However, the cost of land and rentals are excluded for this purpose.
• It is pertinent to note that only capital expenditure (excluding front end) is covered in the definition of ‘back-end infrastructure’ thereby implying that the cost of maintenance of such infrastructure will not be counted towards this limit;

• At least 30% of the procurement of manufactured and processed products should be sourced from ‘small industries’;
• The above limits are required to be certified by statutory auditors;
• Retail stores to be set up only in cities with population of more than 1 million. 53 cities presently qualify out of a total number approximating 8000.

SBRT - 100% under approval route (existing 51% under approval route)

In light of the fact that the total FDI in SBRT since 2006 has not yet touched USD50 million, the existing cap of FDI in SBRT has been enhanced from 51% to 100% under approval route. The relaxation is intended to significantly increase the FDI inflow in SBRT. The conditions attached to SBRT are as follows:

• Products to be sold should be of a ‘single brand’ only;
• Products should be sold under the same brand name internationally;
• ‘Single Brand’ product retailing would cover only those brands which are branded during manufacturing
• The foreign investor should be an owner of the brand;
• For FDI beyond 51%, 30% sourcing  would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen.  Other than this rider, the four conditions mentioned above were currently apply to FDI in SBRT.

 Condition of 30% sourcing from small scale sector

• 30% sourcing is mandatorily required from micro and small enterprises with plant and machinery up to USD1 million (SME).
• The stated intent of this requirement is to ensure that the Indian SME sector benefits, including artisans, craftsman, handicraft and the cottage industry. Given this intent, it is unclear why sourcing has been permitted from SMEs anywhere in the world and not just in India.
• This condition is applicable both for MBRT and for SBRT where FDI exceeds 51%.

While the exact impact of the above policy change will take a few years to unfold, the perceived advantages and disadvantages arising from the policy relaxation are expected to be as follows:

Advantages

• Significant employment generation
• Efficiency in supply chain coupled with capacity building and induction of modern technology
• Expected to contain food inflation, at least in the medium term by increasing its supply
• Will help the sector become more organised
• Securing remunerative prices for the farmers by ensuring direct procurement of agriculture produce
• Benefit of lower costs to consumers on account of increased competition

Disadvantages

• Potential labour displacement
• Disintegration of established supply chains by establishment of monopoly of global retail
• Adverse impact on domestic small and unorganised retailers