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Retail in India – looking forward

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Tracking the reforms
Liberalisation has always been treated with caution by Indian government. It has evolved with time through constant reforms. Allowing international investors to enter Indian retail business was another step in this direction. Companies relied on franchise route before retail sector was opened to international investors. Press Note 3 (2006) which liberalised single-brand retail by FDI up to 51 per cent gave tremendous boost to the sector. 100 per cent FDI in ‘cash and carry’ wholesale trading has led to supermarkets and cash-and-carry becoming the fastest growing segments in retail. Liberalisation of FDI in multi brand retail is still awaited.

According to FICCI in its report ‘Organised retail: Unfinished agenda & the challenges ahead’, retail sector is projected to have a turnover of $430 billion by 2010 with organised retail sector having a $90 billion share. Even after the restrictions placed on investment in Indian retail market, there has been a phenomenal rise in the number of large multinationals entering Indian market under both single brand wholesale and ‘cash and carry’ model. As per Global Emerging Markets Survey (GEMS) ‘India is considered particularly attractive because of the size of its market compared to low presence of international retailers’. Retail sector being the second largest sector of the Indian economy after agriculture, has significant growth prospect. Vital measures were expected to be taken for further liberalisation of the sector to meet the demands of international investors and benefits to Indian economy.

Budget offerings
Prevailing reformist mindset led to several expectations from the UPA Government in the Budget 2009-10. However, apart from implementation of certain benefits and concessions which can aid retail sector indirectly, this budget didn’t offer any substantial benefits for the retail sector. It focused mainly on benefits to poor and middle class in its effort to stimulate economy’s growth.

Some of the measures which provide indirect benefit to the retail market include abolition of Fringe Benefit Tax, Commodity Transaction Tax, increase in the threshold limit and removal of surcharge of individual tax payers. These measures would leave both consumers and retail sector with more cash flow and allow the retail traders more flexibility in their policy formation. Measures undertaken such as simplification of tax scheme for small business houses, increase in expenditure towards infrastructure and reduction in the custom duty would also be beneficial for the retail sector in an indirect manner.

Need of the hour
Although investments in India under single brand retail are increasing even with the prevailing restrictions, there is a need to allow 100 per cent FDI in single brand retail. The investing companies face bureaucratic problems in obtaining clearances. Apart from the procedural difficulties, finding an Indian minority partner is another hurdle they come across. Such companies also often face incompatibility issues with their joint venture partners. Many multinationals like IKEA have kept away from entering the Indian market due to these difficulties which are the result of the current restrictive FDI norms. Opening Indian retail market fully to foreign investment would help remove such difficulties and consequently encourage investments.

Suggestion given by Economic Survey Report 2009 to open multi brand retail to FDI also needs to be implemented. This should bring tremendous amount of investment into the country by leading global multinationals. At the same time, since radical changes can pose some risk to a developing economy like India, FDI in multi brand retail may be opened also in a phased manner as under:

• Initial stage: 26 per cent FDI – 2 years
• Establishment Phase: 49 per cent FDI – 2 years
• Mature Phase: 100 per cent FDI – 2 years

Further safeguard measures could include restricting FDI in retail initially to major cities and SEZ as well as to certain sectors. Such steps could reduce risks to the local markets and at the same time boost investments.

Giving ‘Industry Status’ to retail sector would facilitate better regulation and growth as well as allow fiscal benefits in its favour by bringing it under a separate Ministry. Additional measures could also have been taken such as removal of 12.5 per cent Service Tax on rentals, permitting set off of Service Tax against Sales Tax and allowing single window clearance for licences towards the benefit of retail sector.

Various reports have negated the detrimental effect of organised retail stores on the unorganised sector in India. The Report of Indian Council for Research on International Economic Relations (ICRIER) observed that farmers would benefit significantly by selling directly to organised retailers. The report also stated that “Profit realisation for farmers selling directly to organised retailers is about 60 per cent higher than that received from selling in the unorganised market”. Moreover, since indigenous organised retails have already made their presence in the country, allowing foreign investors would infuse more funds which are scarce at present. It would also permit fair competition which would lead to better development of the sector.

Parliamentary Standing Committee on Commerce expressed a need for providing adequate protection to small retailers in its report on Foreign and Domestic Investments in the Retail Sector. The Committee’s recommendation of setting up a Retail Regulatory Authority for looking into anti-competitive behaviour and abuse of dominance of the large retailers can be helpful. Establishment of suggested National Commission would also help in studying the problems of the retail sector and to evolve policies that will enable it to cope with FDI.

Way to go!

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