FDI IN MULTI-BRAND RETAIL TRADING

The government recently released a discussion paper to allow FDI in multi-brand retail trading. Currently, FDI in multi-brand retail trading is prohibited.Current scenario Cash and carry wholesale trading In 1997, FDI in cash and carry wholesale trading was first permitted, to the extent of 100 percent, under the Government approval route. It was brought under the automatic route in 2006. Between April, 2000 to March 2010, FDI inflows of nearly USD 1.8 billion (INR 7,799 crore) were received in the sector. This comprised 1.54 percent of the total FDI inflows received during the period1.Single-brand retail

In 2006, FDI in single-brand retailing was permitted to the extent of 51 percent. Since then, a total of 94 proposals have been received till May 2010, of which 57 proposals were approved. An FDI inflow of nearly USD 194 million (INR 900 crores) was received between April 2006 and March 2010, comprising 0.21 percent of the total FDI inflows during the period, under the category of single brand retailing1. Share of  Retail Trade About 40 percent of the country’s total GDP of USD 1 trillion comes from retail sales to Indian consumers. The local, one-off corner stores account for more than 94 percent ofthis total retail sales of around USD 400 billion2.

Limitations of the present set-up Infrastructure There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. India has a very limited integrated cold-chain infrastructure, with only 5,386 stand-alone cold storages, having a total capacity of 23.6 million MT., 80 percent of which is used only for potatoes1. Thus, lack of adequate storage facilities have caused heavy losses to farmers in terms of wastage in quality and quantity of produce. As per some industry estimates – 25-30 percent of fruits and

vegetables and 5-7 percent of food grains in India are wasted3. Though FDI is permitted in cold-chain to the extent of 100 percent, through the automatic route1; in the absence of FDI in retailing, FDI flow to the sector has not been significant. Intermediaries dominate the value chain Due to a number of intermediaries involved

in the chain, norms are flouted and pricing lacks transparency. According to some reports, Indian farmers realize that only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail4. According to a study commissioned by the World Bank, a farmer receives around 12–15 percent of the price the consumer pays at a retail outlet5 for a typical horticulture product.

Rationale for FDI in retail trading FDI in the retail sector could bring various benefits for the country, such as:

• Improvement in the supply chain infrastructure by bringing in technical know-how and capital:

FDI can be a powerful catalyst to spur competition in the retail industry. It can bring about an improvement in the supply chain infrastructure, investment in technology, up-gradation in agriculture, manpower and skill development and may also lead to an improvement in the overall productivity

 

• Improvement in farmer income through the removal of structural inefficiencies:

Farmers were found to benefit significantly from the option of direct sales to organized retailers. For instance, the profit realization for farmers selling directly to the organized retailers is expected to be much higher than that received from selling in the mandis

 

• Benefits to customers in the form of better quality of products and lower prices:

Past trends indicate that by and large consumers have benefited from organized retail in the domestic market.
FDI policy in retail trading in other comparable countries6 China permitted FDI in retailing up to 49 percent for the first time in 1992 and restricted it to six provinces and SEZs. Following its accession to WTO, the foreign ownership restrictions have been lifted effective from December 2004. There are no equity restrictions since then. Since then, the employment in the retail and wholesale trade has increased from about 4 percent of

the total labour force in 1992 to about 7 percent in 2001. The number of traditional retailers also increased by around 30 percent between 1996 and 20016. According to Euromonitor, retail sales in China, which amounted to nearly USD 554 billion in 2003, were expected to grow rapidly to reach USD 900 billion by 2009. Thus, China’s retail and wholesale trade sector has witnessed impressive growth in foreign direct investment, among others.

Thailand permits 100 percent foreign equity, with no limit on the number of outlets. For the retail business, it has a capital requirement of TBH 100 million and TBH 20 million for each additional outlet, while it has a capital requirement of TBH 100 million for each wholesale outlet. Entry of foreign players in a recessionary economy adversely impacted all segments – wholesalers, manufacturers and domestic retailers in the short run. However, entry of the foreign players had led to the development of organized retailing and Thailand has now become an important shopping destination. Further, it encouraged the growth of agro-food processing industry and enhanced the exports of Thai-made goods through networks of the foreign retailers.

Apart from the above mentioned countries, FDI is permitted in the retail sector in Brazil,Argentina, Singapore and Indonesia without limits on equity participation, while Malaysia has equity caps in this regard. In many of

these countries, opening of the FDI has led to the development of a large organized retail industry and the   entry of major players in the market.