January 10, 2018, is a landmark for the retail real estate sector. With the Union cabinet approving certain changes to the FDI norms directly impacting the sector, real estate in India is expected to take a new leap forward.
100 per cent FDI via direct route is now admissible in single-brand retailing which will allow the sector to expand rapidly, allowing global investors to explore the growth possibilities in India.
There has been a positive outlook towards the economy from most global rating agencies, including the World Bank predicting India’s GDP growth to remain upwards of 7 per cent between 2018 – 2020, making it one of the fastest growing economies globally.
Global investors are consistently scouting for markets such as India to invest and make healthy returns backed by strong economic fundamentals as offered by India in the current scenario.
The opening up of the FDI route for investment in these growth sectors will help the economy to sustain the overall momentum for a longer period of time.
FDI in Single Brand Retail
The Government approved the long-standing demand for 100 per cent Foreign Direct Investment (FDI) in single-brand retail via automatic route.
So far, FDI via direct route was permissible only up to 49 per cent, with any investment beyond the limit requiring government approval. The opening up of the Indian market will be critical in allowing growth in the overall commerce of the country.
This is also a major step in providing quantum growth to the retail sector. The timing for this announcement is significant as the retail sector is poised to receive significant real estate supply in the near future.
The estimated mall supply for top cities in the next two years is pegged at 17.2 million square feet (msf). After a prolonged period of slowdown in the retail sector over the last few years, we saw a strong comeback with developers and investors betting high on the sector.
Retail saw a significant increase in PE investments in 2016-17 indicating a growth in retail real estate in the coming years. The announcement in favour of 100 per cent FDI through direct route will open up India as a global retail market.
The Government has further facilitated the retail sector by temporarily relaxing the norm of mandatory purchase of 30 per cent from Indian sources. This will allow global retailers to come in with international merchandise without concerns of loss of quality or brand equity.
Further, retailers will be able to start operations and will have 5 years to find Indian partners and vendors that qualify in terms of quality and price.
India is one of the most important markets that remains largely untapped by global retails despite their avid interest. This announcement by the Government will now elevate Indian markets to a global platform, making brands reconsider their entry decisions due to stringent regulations.
India has been experiencing a steady growth in per capita GDP at approximately 1.5 per cent y-o-y, which will help in creating disposable income. This will thereby fuel the growth of retail, making it more significant for global retails to exploit the growth.
Global retailers would find it easy to set-up operations in India henceforth. The advent of global brands into India would help in bolstering India’s position as a retail destination in the lines of cities like Dubai, Singapore, and Tokyo. Currently lagging far behind, even India’s top economic centres do not feature high-up in the regional or global stacking of retail destinations.
Retail has been a strong domestic employer but has remained a low contributor to indirect taxes as only at around 13 per cent of the sector is organized. Having global brands enter India will further restructure the sector and increase the GDP contributions move northwards.
Backed by tremendous year of growth of the stock markets in India, and improvement in global ratings on ease of doing business, India’s attractiveness as an investment destination has improved significantly over the last years. During April-September, 2017-18, FDI inflows grew 17 per cent on year at US $25.35 billion.
In the financial year 2016-17, total FDI inflows hit an all-time high of US $60.08 billion, as compared with US $55.46 billion a year ago. These announcements are expected to have a high impact on the economic growth, further channelizing into the real estate sector.
As we move progress into the year, we expect an acceleration of activities in the economy with significant capital inflows. A crucial aspect to remain cautious about would be global developments, such as FED rates, volatility in the stock markets etc. which can create a flight of capital.
If as a country we are able to hedge these, India can indeed go onto a significant growth path crossing the psychological benchmark of 10 per cent GDP.