New FDI rule hits roadblock in India

Indrajit Basu
China Daily Asia Pacific, December 2, 2011

Some predict it will herald a consumer revolution in the huge retail sector, some forecast doom for countless small traders and farmers.

The country’s business and political class has been divided down the middle ever since the central cabinet decided to throw open the retail sector to foreign investors.

While the industry calls it a “landmark decision”, the United Progressive Alliance (UPA) government is feeling the heat, both from outside and within. Opposition parties as well as some key UPA allies demand an immediate rollback, or else they threaten to paralyze Parliament.

Thousands of small traders, farmers and retailers are holding protest rallies across the country fearing that foreign retailers could deprive them of their livelihood.

After almost a decade of foot-dragging and consensus building, the Indian government approved a plan to let foreign investors hold a 51 percent stake in multi-brand retail. The plan also allows foreign investment cap to be raised to 100 percent from 51 percent for single brand retail operation.

Besides allowing global retailers like Walmart, Carrefour, Tesco and IKEA to sell directly to Indian consumers, the relaxed FDI norms will enable fashion brands such as Gucci, Mango, and Zara to open exclusive stores.

That apart, the move would help several troubled organized local retailers to raise money by selling stakes to foreign investors.

“We are absolutely thrilled and have been waiting for the day,” said Gregg Mowins of IKEA in a statement while Raj Jain, chief executive of Bharti Walmart, the 50:50 wholesale joint venture between Walmart and Bharti Enterprises, said the move is “fine”.

Kishore Biyani, the founder of Pantaloon, India’s largest local retailer, predicted the sector could attract as much as $10 billion in 5-10 years. According to him, it’s the “beginning of second generation reforms”.

It is predicted that the burgeoning middle class in Indiawill help the sector generate over $450 billion in annual revenues. Analysts say the 400 million strong, and growing rapidly, middle-class Indians, will transform the sector to a $675 billion behemoth in five years.

The new policy could bring many indirect benefits too. Commerce and industry minister Anand Sharma has said opening of multi-brand retail will not only bring down inflation, the resultant inflow of foreign funds may also help Indiafinance the current account deficit.

“It will also unfold immense employment opportunities for rural youth and make them stakeholders in the agri-business chain from farm to fork,” Sharma said in an open letter.

Nonetheless, with many issues and agendas at play and conflicting views emerging, the issue may be generating “more heat than light”, says Devangshu Dutta, chief executive of Third Eyesight, a consulting firm.

Already all opposition-ruled states, and some UPA allies are against the move. Even some Congress-ruled state governments in Haryana and Kerala are wary of the possible consequences of global retail giants Walmart and Tesco doing business in their states.

“We have no evidence that it will be beneficial for small businessmen,” said Amit Mitra, the finance minister of the state of West Bengalwhich is ruled by key UPA ally, Trinamool Congress.

Admittedly, there will be winners and losers.

According to Dutta, losers will include simple intermediaries and low-value wholesalers who have a diminishing role in a better-connected economy. However, he adds, “The fact is that most of them would anyway be losing in absolute or relative terms to the large Indian retailers over the course of the next few years; it would be naive, even dishonest, to suggest otherwise.”

According to an academic, liberalization of retail is good news, but the government must put in place a few complimentary measures.

“FDI in retail’s biggest hurdle will be infrastructural issues like lack of suitable supply chain, lack of real estate availability, high power cost, etc.,” says Professor Arpita Mukherje of National Council of Applied Economic Research.

First, Indiamust scrap the Agricultural Produce Marketing Committee Act, which denies farmers and buyers the freedom to buy and sell freely and empowers a group of middlemen, she says

“Besides, there are strict conditions in the policy as well,” says Mukherjee.

According to the policy, global retailers must invest a minimum of $100 million upfront (of which half must go into back-end infrastructure) and source at least 30 percent of their products from small domestic industries or village craftsmen.

The government, too, will have the first right to procure farm products.

“Retailers across the world are bleeding; it remains to be seen how foreign retailers react to these conditions,” says Mukherjee.

Dutta feels there will be a period of “wait and watch to see how the new policy affects India’s retail. It will take a while to build momentum”.

Likewise, BS Nagesh, vice-chairman of Shoppers Stop, another major local retailer, says FDI in multi-brand retail will help only those looking at divesting their stakes or those looking for partners.

Meanwhile, the Ministry of Commerce and Industry on Nov 28 reviewed the sourcing clause to mandate a minimum 30 percent sourcing “from Indian micro and small industry having capital investment of not more than $1 million”.

In a desperate effort to pacify the opposition, the ministry also added that the clause was changed, “to encourage domestic value addition and manufacturing, thereby creating a multiplier effect for employment, technology upgrade and income generation”.

Earlier, the policy had said, “Thirty percent sourcing is to be done from micro and small enterprises which can be done from anywhere in the world and is not India-specific.”

(Read: "Debate on FDI in Retail — More Heat than Light")