FDI in Indian Retail – Much to be done just than being said..

FDI in Indian Retail – Much to be done just than being said..

The titans of retail vs. the kirana stores

The Urban Indian has been eagerly waiting for a shopping experience at the Harrods, the Wal-Marts, the Tescos, et al but the catch is “Here! In India”! But the big question is “When?” An easy question to ask but surely not that easy to answer!

Let’s have a look at the scenario:

Current Scenario:

Retail trading (except under single-brand product retailing — Foreign Direct Investment (FDI) up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a ‘single-brand’; this condition being in addition to a few other conditions to be adhered to. This is the reason why the Urban Indian is still waiting for the Wal-Mart in India!

India as a country is not that much reserved though in the retail sector, as one may perceive from the hue and cry around FDI in retail in India at present. In the year 1997, Govt. of India allowed for FDI upto 100% in the cash and carry model (Wholesale format). Slowly and gradually it further opened up and in the year 2006, an investment to the tune of 51% of the total outlay was allowed for the FDIs in Single Brand retail outlets. However, Multi Brand retailing has not been opened up still. A proposal is there and hence the great discussion.

However, it is noteworthy that India is a member of the General Agreement on Trade in Services of the World Trade Organisation and hence it India was bound to open the retail sector, both in case of wholesale and retail.

FDI Policy in India:

The FDI policy as stipulated by the Govt. of India, the Foreign Exchange Management Act (FEMA) and the Reserve Bank of India (RBI) govern the FDI in India. Except for a few sectors where the approval of Foreign Investment Promotion Board (FIPB) and/ or RBI is required, the foreign investors are free to invest in India. Lets look at the Retail sector of India. The current policy says that:

• FDI up to 100% for cash and carry (wholesale) trading and export trading allowed under the automatic route.
• FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products.
• FDI is not permitted in Multi Brand Retailing in India.

Single Brand Retailing and FDI:

In single-brand retail, FDI up to 51 per cent is allowed, subject to FIPB approval and subject to the conditions that (i) only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed) (ii) products should be sold under the same brand internationally, (iii) single-brand product retail would only cover products which are branded during manufacturing and (iv) any addition to product categories to be sold under “single-brand” would require fresh approval from the government.

This means that foreign companies would be allowed to sell goods sold internationally under a ‘single brand’ say for example a Nokia, Samsung, et al. Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed.

However, there is ambiguity to the meaning of Single Brand as defined by the Govt. of India. The existing policy does not clearly mention whether retailing of goods with sub-brands clubbed under a major brand can be considered as single-brand retailing or not.  Also it does not clarify whether co-branded goods would qualify as single brand retailing or not!

Multi Brand Retailing and FDI:

Multi Brand retailing, as it appears to be, means that a store/ company or any such business unit can sell multiple brands under the same roof. However, at present the Govt. has not given a concrete definition of Multi Brand retailing.

Recently there have been many discussions about multi brand retailing in India. If allowed, it means that the idea which the Urban Indian fancied will come true. India will have its own share of the Wal-Marts and the Tescos!

Multi Brand Retailing and the debate!

-          Concerns

If Multi Brand retailing is allowed in India, the concerns which the common man in India is having are:

(i)                 Unfair Competition: It will result into unfair competition as the small domestic Indian shopkeepers will find it too difficult to compete with the titans of retail! This may result into the exit of large number of such small kirana store owners which may further lead to large-scale unemployment.

(ii)               Huge Bargaining Power: There are serious concerns that these titans of retail, with their huge bargaining power, both in terms of purchasing and at a later stage, selling too, will control the prices and hence the markets too! And obviously, people believe, it would hardly be in the benefit of the customer.

(iii)             Indian Retail - A budding flower: Organised Indian retail is at a nascent stage. To allow such big retailers to come to India would mean the death of Indian retail. A theory says “Let the Indian Retail mature first and then open it up to the sharks of retail”.

(iv)              Indian Consumer: This is the biggest question, I believe! The Indian Consumer! Where does she stand? Does she really have the price advantage and the luxury of being spoilt for a choice or is it just on the cards? This question, I guess, only time can answer.

Makes sense!

-          Benefits

If Multi Brand retailing is allowed in India, the benefits which the common man in India is perceiving are:

(i)                 Stimulus to the Indian traders: A lot has been said about the poor productivity of Indian businesses. The competition will spur them to be productive. This sounds interesting and appealing too!

(ii)               Access to Best Management: Indian business houses will get access to best management practices, take for example, the supply chain management of Wal-Mart is an example for many in the retail sector.

(iii)             Increased capital flow: Multi Brand retailing will ensure increased capital flow in our country. This capital can be used for the betterment of the citizens of this country.

(iv)              The “Middlemen” eliminated – The entry of these players will possibly mean that the “middlemen” are eliminated and hence benefits both, the producer and the consumer.

(v)                Growth of Indian Retail sector:  Indian Council of Research in International Economic Relations (ICRIER) which conducted a study on impact of such big players in the Indian retail sector has said that the worth of Indian retail sector is about to reach $496 billion by 2011-12 and it has come to the conclusion that investment of ‘big’ money (large corporates and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers.

Again, makes sense!

Conclusion:

As it comes out to be, it is a very important decision that the Government and the people of India have to take. A cautious approach would work. However, it appears that a phased involvement of FDI in the Indian retail sector (Multi Brand too) can be the solution. It will not only result into a surge in the country’s GDP and overall economic development, but would also help the Indian retail market match the global retail market.

A few points to be noted that can help:

-          A phased involvement should be there. Just like we started from the cash and carry model!

-          The interests of the farmers and others small traders should be safeguarded.

-          The titans of retail should necessarily be made to invest in the backend i.e. the operations and other areas (cold storage facilities, facilities that connect the farmer to the store amongst others).

-          Employment generated by these giants should guarantee a part of its employment to the displaced people.

-          To protect the small retailers the government should come up with a framework which ensures that the titans do not resort to predatory pricing.

It seems that the path for FDI in Indian Retail is highly complex, but a cautious and informed approach from the Government and the citizens will help the country grow further.