FDI in retail: Bold step, but a long way to go…

Ever since the Union Cabinet gave its nod on increasing the FDI limit in multi-brand retail to 51 per cent and mono brand retail to 100 per cent last week, it has triggered a heated debate both among political and industry bigwigs.

In a rare show of unity Opposition parties are to move an adjournment motion in both houses of Parliament on why the government's decision on allowing FDI in retail should be revoked.

Meanwhile, the Reserve Bank of India has welcomed it saying if implemented properly it will cool down inflation which has been a major cause of concern due to its double-digit mark since December, 2010. But industry experts say retailers would take at least 12-18 months to actually enter India after the latest decision. And as far as the existing global players who are already in India are concerned, they may take up to a year to start multi-brand operations after re-negotiating with their Indian partners. The aggressive activities may not commence even in 2012 from the retail perspective due to the low economic conditions globally, so the year 2013 would see global players engaging in a tug of war to capture the retail pie in India.

The issue was pending for a long time and the government did not act on it earlier since there has been resistance from the opposition and other political parties. While the Left, BJP and UPA constituents like Trinamool Congress, DMK are vehemently opposing it the Congress itself is facing criticism from within. Corporate Affairs minister Veerappa Moily said “It (FDI in multi-brand retail) will help to tame inflation and (promote) growth rate. A good, systematic supply chain will help in bringing down inflation and help farmers." Moreover, retail is a state subject and many state governments may not allow global players to open in their states. Reports suggest nearly half of the 53 cities in India may slam their doors on global chains. According to the 2011 data on the Census of India website, there are 46 cities that had a population of 10 lakh of which 25 are unlikely to allow the likes of Wal-Mart, Carrefour and Tesco to open stores since the political leadership in these states have gone on the offensive against the government's move. This inspite of the fact that on a long-term basis, opening up of FDI in retail is definitely seen as a positive move to tackle inflation as well as the Indian rupee as global retailers look to set up shop in India.

Interestingly, under attack from the Opposition and UPA ally the government on Sunday launched an ad campaign to sell advantages of FDI in multi-brand retail. The commerce and industry ministry ad says FDI in multi-brand retail will help farmers, create more jobs and benefit consumers. In a full page advertisement in newspapers, the commerce and industry ministry said foreign direct investment (FDI) in multi-brand retail will help farmers, create more jobs and benefit consumers.

Meanwhile with the government’s announcement Indian players have already started firming up JV plans. For example, Bharti Enterprises is in talks with the world's biggest retailer Wal-Mart for a joint venture in front-end retail after thanksgiving. Other global retail giants such as Tesco and Carrefour, who were so far barred from entering into front-end retail in India, would now be able to make an entry along with the Indian partner. The R P Goenka group, which runs more than 200 Spencer's Retail stores is also planning to get a foreign partner in hypermarkets and may convert the franchisee agreement with US-based Au Bon Pain for cafes through a joint venture.

This big-ticket policy decision comes almost after seven years when in January 1997, FDI up to 100 per cent was allowed under automatic route in cash-and-carry during H D Deve Gowda’s United Front government for the first time. In October 2003, German cash-and-carry player Metro entered India. In January 2006, FDI up to 51 per cent was allowed in single-brand retail and cash-and-carry rules were relaxed, under the UPA-I regime, then in November 2006 an agreement for retail space was signed between American major Wal-Mart and Bharti Enterprises followed by JV in cash-and-carry business was announced in August 2007 by them. In August 2008, UK-based Tesco entered into an alliance with Tata group’s Trent and in December 2010 French retail giant Carrefour opened its first cash-and-carry store in India.

For domestic retailers, this will open up FIIs and strategic investments, which in turn would enable them to dilute equity. Industry players have unanimously nullified concerns of job losses that FDI could result in as expressed by the political parties.