FDI in retail a mixed bag in India | SupportBiz

Top Story

FDI in retail a mixed bag in India

It is a mixed bag as far as reactions to government decisions, to permit foreign direct investments into multi-brand retail and tweak sourcing norms for single-brand retail, in India are concerned. Those in praise of the government’s moves point out that policy hurdles, that can make it difficult for foreign retailers to enter India, still exist.

Permitting FDI in multi-brand retail is an important signal, according to the Retailers Association of India (RAI), a trade body. “However, clauses around compulsory investment of at least $100 million coupled with a 50 percent backend investment clause; 30 percent sourcing from Indian MSMEs, state-wise permission etc. can still be big hurdles for retailers wanting to enter India,” said Kumar Rajagopalan, CEO, RAI.

The decision to tweak the local sourcing norm for foreign direct investments by single-brand retailers is ‘a good move’, Rajagopalan said. “The norm of 30 percent sourcing from India by itself was a norm that was understandable since the government was keen to support local manufacturers,” said Rajagopalan,

“However the clause that this has to be from the MSME sector was a big deterrent since this forces retailers to buy a big part of their merchandise from companies which are small and may not be able to offer economies of scale. Also it is known that many companies could move out of the MSME bracket after it sees lucrative business from a retailer,” Rajagopalan said.

“Modification of this clause to ‘preferable’ instead of ‘mandatory’ is a good move and is making a lot of single brand retailers re-think plans for India” said Rajagopalan.

India needs to ‘boost capital inflows and narrow its fiscal deficit,’ according to the Wall Street Journal.

Industry in Asia’s third largest economy, where delayed monsoon rains played havoc with commodity prices and inflation, posted weak manufacturing data in July. Output at factories, mines and utilities grew 0.1 percent in the span of a year, according to news reports. The global economic slowdown has dented export orders at a time when manufacturers are burdened with high interest rates.

The country should relax rules around ‘foreign investments’ and sort out ‘controversial tax issues to improve investor confidence and boost capital inflows’, the WSJ quoted the head of the International Monetary Fund (IMF) mission for India, Laura Papi, as saying.

"Sharper (economic) slowdown has not been accompanied by a commensurate decline in inflation," Papi told the WSJ.

FDI in multi-brand retail, which will help bring in investments, is not without opposition.

India’s trader community, by and large, is up in arms about FDI in multi-brand retail and, with help from political parties opposing the government decision, successfully executed a nation-wide shutdown on Thursday.

Traders, numbering around five crore across India, fear a loss of business and livelihood. “A big (retail) giant (such as) Walmart has an annual turnover of 18 lakh crore; Carrefour 5.85 lakh crore; Tesco 4.5 lakh crore;  and Metro 4.2 lakh crore. Their resources are enormous and our retailers cannot compete and stand before them, resulting (in) huge unemployment,” said Amrit Lal Jain, president, Punjab Pradesh Beopar Mandal.

FDI in multi-brand retail could help manufacturers of processed food products. Himachal Pradesh’s state-owned agri –products makers, already in losses, could benefit if and when large retailers choose to buy fruit juices from these loss-making entities, according to the local unit of the Confederation of Indian Industry (CII), an industry lobby.

“We have talked to the state government to take some steps to boost the local industry in Himachal Pradesh because the state is known for quality fruit-based products,” said Atul Sharma, CII deputy director for that state.

Midsize industries could be affected if they are unable to sell to multi-brand retailers, according to another trade association representing manufacturers in the Faridabad town, on the outskirts of the national capital. “(FDI in multi-brand retail) is a wrong decision by the government as it could harm local manufacturers in a big way. However, the small industry will manage to survive in the presence of big players in the market,” said Shailendra  Kapoor, secretary, Faridabad Industries Association.