Home Retail FDI in Retail: A mutually beneficial arrangement

    FDI in Retail: A mutually beneficial arrangement

    By  
    SHARE

    Overseas retailers should work with the small and medium businesses in India to ensure overall growth of the sector and benefit all stakeholders, says Goldie Dhama and Sahil Gupta from PwC. Dhama is an associate director, while Gupta is senior manager, Regulatory Services, PwC.

    The Indian government has over the years opened the retail sector in a calibrated manner. First allowing foreign retail players to set up wholesale cash-and-carry stores in India, initially with a government approval and then under automatic route. This allowed the foreign retailers to engage in business-to business trading activities in India by selling products to other wholesalers, retailers, businesses, and institutions. This enabled the foreign players to support the Indian distributors, retailers, businesses, farmers, and consumers.

    Thereafter, the government allowed specialized foreign brand owners to set up retail shops in India by forming joint ventures with Indian partners through the single brand retail window. Foreign investors are permitted to own 51 percent stake in such joint venture company, with the idea to allow the Indian consumers access the global luxury brands. While there have been 60 approvals granted under this window, several companies have not made a beeline for India on account of the mandatory Indian partner requirement, mainly due to commercial concerns on sharing the “brand” rights with a joint venture partner. The pie is big enough to accommodate several other brands to set up self-owned shops in this country and make India a luxury destination.

    Multi-brand retail, though, continued to remain a restricted zone for strategic investment by foreign investor. However, persistent increase in food inflation, contributed also by lack of adequate back-end infrastructure and cold storage facilities leading to food wastage has formed the genesis for initiating discussions among stakeholders on liberalizing the sector to allow FDI. It took many rounds of dialogue with stakeholders, an inter-ministerial and state government consultation process, and representations from other country heads before the Committee of Secretaries (in July this year) which finally led to the Union Cabinet recommendation on opening this sector to 51 percent foreign investment, subject to certain conditions.

    In fact, even the inter-ministerial group (IMG) on inflation had strongly advocated liberalizing this sector so that back-end logistics and farm-to-fork supply chain can be made more efficient and stronger. To achieve this objective, the Union Cabinet recommended a minimum investment of US$ 100 mn, 50 percent of which has to be made in developing back-end supply chain and the related infrastructure. Back-end infrastructure has been defined to include setting up of cold chain storage facilities, processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, agriculture market produce infrastructure, etc. Any expense towards land cost, rentals and front end business will not qualify as investment in back-end infrastructure. This should kick start development in setting up and expansion of cold storage facilities which already has in place an incentive based framework in the form of foreign currency loans, 100 percent tax deduction and concessional custom duty with full service tax exemption.

    Further, to provide impetus to the growth of Indian small and medium enterprises (ones which have a total installed investment in plant and machinery not exceeding US$ 1 mn) and making them globally competitive, the Union Cabinet also recommended that at least 30 percent of the procurement of manufactured/processed products should be sourced from such enterprises.

    One of the most significant beneficiaries of the liberalization will be the consumer – the king! Once FDI is allowed, it will provide consumers with more choice, for both products as well as retail chains to choose from, apart from getting the products at best prices. The government exchequer stands to gain as the share of organized segment in retail trade will increase leading to better tax collections. The farmers/growers will have an advantageous and an efficient supply chain available to them, with an assured market platform and a market for their produce apart from helping them realize better value for their produce. The country’s macro-economics is also expected to gain with increased FDI flows as well as creation of millions of jobs across the country – both at retail store levels and in back-end linkages.

    Global players, with constraints in their domestic markets, are looking at emerging economies like India for growth. The Indian domestic players are also gearing up to face competition. Indian players are enhancing and diversifying their product range, improving the look and feel of products, creating a larger distribution presence (for example, outlets, shop in shops, etc.) Obviously, for all this, the Indian players need funds. Where will this funding come from, considering that most of the Indian retail players are currently bleeding. Access to global funds, therefore, becomes an imperative choice.

    India’s market fundamentals already support growth – market size of US$ 350 bn, organized retail penetration being only 5-8 percent and yet the industry growing at 15-20 percent CAGR. Strong demographic dividends (for example, 350-million strong middle class, large young brand conscious population where 50 percent are under 25 years) further add to the strong credentials of the country. Creating an enabling investment framework will contribute manifold and have a multiplier effect on the development of retail industry as a whole.

    To conclude India’s retail market is a study in comparison to the western world with the consumers being value driven, price conscious and service spoiled. It will be important for overseas retailers to understand this and work with the small and medium businesses to ensure overall growth of the sector and benefit all stakeholders.