53 cities qualify for retail FDI

Nupur Anand, Daily News & Analysis (DNA)
Mumbai, September 15, 2012

India’s retail industry, which is pegged at US$450 billion, could expand manifold with the opening up of foreign direct investment (FDI) on Friday.

Currently, the so-called modern trade — or retail chains – have only 5% share of that pie.

The catch, however, is that the 51% FDI decision has been left to the state governments. That’s where implementation problems will arise, said experts.

Trinamool Congress (TMC) that rules West Bengal has given a 72-hour notice to the government to change their decision. TMC, which is a key ally of the Congress, had managed to push back reforms in retail sector last year. After stiff opposition from TMC, BJP and Left, the government had to beat a hasty retreat in November 2011.

But Union minister of commerce Anand Sharma said the government is firm on its decision and there would be no rollbacks.

The opposers contend that entry of foreign retail chains will wipe out smaller, traditional players.

Arvind Singhal, chairman of Technopak Advisors, a retailing consultancy, strongly refutes this.

“Even when modern retail started in India there was hullabaloo that the mom-and-pop stores will be wiped away. This has been proven to be wrong. And if Indian retailers have not managed to harm the unorganised sector, there is no way foreign investments will. It has been already proven that both organised and unorganised sectors can co-exist without much friction.”

“Investments flowing in also means more jobs will be created,” said Akash Gupt of PriceWaterhouseCoopers. “As organised retail expands, it will hire more people.”

The government has pinned a few riders when opening up: Foreign entities will have to invest 50% in setting up back-end operations and 30% of the sourcing has to be done from small and medium enterprises.

The sourcing norm, however, is likely to be eased.

Analysts said these two rules will create more and better quality jobs.

What about pricing?

“The price will not be impacted majorly. If anything, it may come down due to stiff competition. Better infrastructure will also ensure that the quality of the products increases tremendously,” said Anil Talreja, partner, Deloitte Haskins & Sells.

The riders also include that any multi brand entity should have an investment of $100 million (Rs 500 crore) and the stores can be opened up only where the population is more than 10 million. At present, there are 53 cities in India that fit this bill.

Analysts said the largest investments are likely to flow into the food segment.

This decision will also be a big relief for cash strapped domestic players such as Future Group.

“Even global brands will be on the lookout for a strong domestic partner. This will provide the global players a customer base, infrastructure facilities and will reduce the gestation period,” said Devangshu Dutta of Third Eyesight, a retail consultant.

But investments are unlikely to flow in very soon. “Companies will take time to assess the market and make investments accordingly. They will also wait for the political situation to stabilise,” said Singhal of Technopak Advisors. The developments have warmed the cockles of Raj Jain, president of Wal-Mart India, the unit of the world’s biggest retailer.

“We are grateful that the government has realised and appreciated the value that we will bring to strengthen the Indian economy,” he told Reuters. “This policy change will allow us to connect directly with the consumer and help save them money.”

(Published online in DNA on 15 Sep 2012.)