Recent declaration of the CoS approving a 51% FDI in multi-brand retail has brought joy among the Indian retail sector. What exactly is brought to the table? Will FDI become the beacon of the Indian retail market?

India ranked second in the world, in terms of financial attractiveness during 2010. Regardless of the fact surveys state that 75% of the Indian population earns only around $2 a day, the Indian retail sector would be an appealing context to many foreign investors. Huge market potential for many products, untapped market scenario, and the drastic change in the income level and lifestyle of Indian youth are attracting the eyes of foreign investors. Furthermore, India's Committee of Secretaries (CoS) has voiced its approval for 51% of FDI in the multi-brand retail industry. India has already allowed for 51% FDI in single-brand retail, and 100% FDI in cash-and-carry business formats.

CoS has recommended FDI in permitted 36 big cities with more than 1 million population. Global retail giants would be allowed to own 51% of ownership provided they invest USD 100 million. Retailers such as Wal-Mart, Tesco, Carrefour, and Bentonville are likely to open their stores through strategic partnerships. The 'Economic Survey of India' presented by the Government to the Parliament states, "Permitting FDI (foreign direct investment) in retail in a phased manner beginning with metros and incentivizing the existing retail shops to modernize could help address the concerns of farmers and consumers. FDI in retail may also help bring in technical know-how to set up efficient supply chains which could act as models of development".

Benefits of Foreign Investments:

Business Monitor International predicts Indian retail sales to leapfrog from USD 395 billion in 2011 to USD 785 billion by 2015. Strong economic development, population growth, increasing levels of individual income, and the growth of organized retail infrastructure are said to be the key factors fueling the growth. A research report on 'World Investment Prospects Survey 2009-12' forecasts India to be among the top five destinations for foreign investors during 2010-12.

During May 2011 FDI inflows were USD 4.66 billion, the highest in the past 39 months. India's foreign exchange reserves (Forex) have increased by USD 2.29 billion for July 2011. India has the potential to emerge as the biggest market in the US Export-Import Bank (Ex-Im) in the next 1 year. 86 deals were acquired by Indian companies from foreign companies during the first half of 2011.

Top investing countries:


In FDI equity investments, Mauritius tops the list, followed by US, UK, Singapore, Netherlands, Japan, Cyprus, and Switzerland.


Retail Benefits:


Indian retail contributes to 14% of the country's GDP righteously being regarded as a sunrise industry. Among the emerging markets, Indian retail is considered as the second attractive destination. This has fascinated retail giants from across the world. The country is now in the global radar, and has enormous potential for attracting foreign investments.


Newstonight.net reports Kishore Biyani, Pantaloon Retail's managing director saying, "We'll see a lot of new retailers coming in, who will be keen on looking at India. It looks like a positive step. The industry needs money and the industry needs to grow. "


Retailers believe that facilitating FDI will minimize wastages, as big players will build backend infrastructure. Organized retail growth is likely to increase by 10-12% after the inflow of foreign investments. Apart from improving productivity, FDI will also have spillover effects on the Indian retail industry. Possibilities exist that this move might make India, a big market like China. Wal-Mart is currently on a track of joint venture with Bharti retail and is expecting more possibilities in the future. The proposal will augment the growth of small and medium enterprises, as multi-brand retailers are required to source and sell at least 30% of their products from small retailers.


Government's decision of inviting FDI has also brought a little heartburn. Arguments exist stating that the proposal would affect the interest of small shops that are the back bone of Indian economy. It is feared that flooding the country with supermarkets might result in massive unemployment in the country. Big retailers may also undercut the margins of small store owners, thereby throwing them out of the business. Chances are there, that this situation might lead to monopoly.


Government is making efforts in making India an investor friendly destination. Careful observation and analysis is required from the Government, and come up with comprehensive policies before opening up the sector to foreign investors.


References:


1)     Consolidated FDI Policy (Effective from April 1, 2011), Government of India, Ministry of Commerce & Industry, Department of Industrial Policy & Promotion (FC Section), CIRCULAR 1 OF 2011, dipp.nic.in.

2)     Data source: dipp.nic.in

3)     India-briefing.com

4)     Moneycontrol.com

5)     Ibef.org

6)     Retail.franchiseindia.com