The FDI Co­nun­drum

Samir Alam re­ports on how 100 per cent FDI in sin­gle brand re­tail could af­fect the In­dian ap­parel mar­ket.

Apparel - - Contents July 2018 -

A re­port on the ef­fects of 100 per cent FDI DI in Sin­gle Brand Re­tail on the In­dian ap­parel rel mar­ket

In Jan­uary of this year, the govern­ment be­gan per­mit­ting 100 per cent For­eign Di­rect In­vest­ment (FDI) in sin­gle brand re­tail busi­nesses. This marked a sig­nif­i­cant step by the ad­min­is­tra­tion in mak­ing In­dia a more at­trac­tive in­vest­ment desti­na­tion for for­eign funds. Un­der the terms of the new pol­icy, for­eign busi­nesses seek­ing to in­vest in re­tail op­por­tu­ni­ties in In­dia no longer have to seek govern­ment ap­proval and can gain en­try via an au­to­matic route. This change has gen­er­ated both pos­i­tive and neg­a­tive re­ac­tions from dif­fer­ent parts of the In­dian mar­ket for a num­ber of rea­sons. How­ever, its im­pact on the over­all re­tail mar­ket in gen­eral, and the ap­parel mar­ket in par­tic­u­lar, is still un­cer­tain.

OVERVIEW OF THE CHANGES

Typ­i­cally, FDI has been an es­sen­tial source of mon­e­tary re­source dur­ing In­dia’s eco­nomic lib­er­al­i­sa­tion process. How­ever, while many de­vel­op­ing na­tions across the world have opted to al­low for­eign cap­i­tal in­ter­ests to make a home

in their do­mes­tic economies early in their growth phase, In­dia has main­tained a rel­a­tively dis­ci­plined limit for out­side play­ers. We have seen ex­am­ples of how de­vel­op­ing na­tions have suf­fered through im­proper reg­u­la­tion of FDI in their economies, even­tu­ally al­low­ing multi­na­tional com­pa­nies to dic­tate terms as they ac­quire greater in­flu­ence and con­trol in these na­tions. Only in the last 20 years, has In­dia proac­tively at­tempted to en­tice for­eign in­vest­ment money while main­tain­ing con­trol over es­sen­tial sec­tors of the econ­omy.

From 1997 to 2006, In­dia prac­tised the govern­ment ap­proval route for most in­com­ing funds and con­tin­ued to at­tract an ever in­creas­ing in­flow of FDI from around the world. How­ever, the global re­ces­sion dur­ing the 2007-09 pe­riod had a rip­ple ef­fect, drop­ping FDI in In­dia from USD 31.4 bil­lion in 2008-09 to USD 25.83 bil­lion in 2009-10, which fell fur­ther the year af­ter to USD 21.38 in 2010-11. Af­ter the pre­cip­i­tous de­cline of over 35 per cent, the worst had passed and FDI in­flows con­tin­ued to rise in sub­se­quent years from USD 35.1 bil­lion in 2011-12 to USD 43.48 bil­lion in 2016-17. The pe­riod from 2012-13 to 2016-17 has wit­nessed a Com­pound An­nual Growth Rate of over 14 per cent in the to­tal FDI for In­dia, which is a promis­ing sign for eco­nomic growth.

Af­ter years of care­ful consideration over fi­nan­cial sovereignty and mon­e­tary au­ton­omy, In­dia be­gan slowly eas­ing into al­low­ing for­eign funds to in­flu­ence the In­dian econ­omy. For many of the early years, these in­vest­ments were re­stricted to non-sen­si­tive ar­eas and only grad­u­ally were opened up to the wider mar­ket. With this year’s re­lax­ation on the ap­proval re­quire­ments for sin­gle brand re­tail, the In­dian ad­min­is­tra­tion is ef­fec­tively giv­ing a boost to in­ter­na­tional brands in the re­tail sec­tor to have an open field with re­gards to the In­dian con­sumer.

FDI IN RE­TAIL

This trade-off be­tween con­trol and growth is a cru­cial com­pro­mise that is ne­c­es­sary to en­sure eco­nomic growth in the cur­rent global land­scape. How­ever, given the ease of cor­rup­tion and fi­nan­cial ma­nip­u­la­tion, it needs to be care­fully nav­i­gated. The core ob­jec­tive has al­ways been to en­hance not only the scale of in­vest­ment in the In­dian in­dus­try but also the qual­ity of in­vest­ment. In the re­tail sec­tor, the goal has al­ways been to utilise FDI to cre­ate fun­da­men­tal and struc­tural en­hance­ments such as the im­prove­ment of the sup­ply chain and back-end re­tail setup. This would al­low the na­tion a higher po­si­tion in the global value chain in or­der to be more than sim­ply a source of cheap re­sources and labour, and in­stead be­come a ven­dor part­ner for global play­ers.

Pre­vi­ously, for­eign play­ers could only in­vest in sin­gle brand re­tail in­vest­ments up to 49 per cent via

THE TRADE-OFF BE­TWEEN CON­TROL AND GROWTH IS A CRU­CIAL COM­PRO­MISE THAT IS NE­C­ES­SARY TO EN­SURE ECO­NOMIC GROWTH IN THE CUR­RENT GLOBAL LAND­SCAPE.

the au­to­matic route, with govern­ment ap­provals ne­c­es­sary for any­thing up to 100 per cent. In the ab­sence of this re­stric­tion, the speed and scale with which for­eign play­ers can roll out their In­dian re­tail oper­a­tions is ex­pected to see a mas­sive uptick. Along with this, the abil­ity to earn com­plete au­ton­omy in rev­enue and strat­egy over their In­dian busi­nesses will also in­cen­tivise for­eign com­pa­nies to more fully ex­pand their oper­a­tions. How­ever, one of the key con­trols still be­ing en­forced in sin­gle brand re­tail is the re­quire­ment of 30 per cent (by value) sourc­ing of busi­ness pur­chases from In­dian busi­nesses. Com­pa­nies can also set off any do­mes­tic sourc­ing for their global busi­nesses against the same quota from In­dia. In this man­ner, the govern­ment hopes to en­sure that mid and small size com­pa­nies in In­dia are not com­pletely left out in the cold.

FDI AND AP­PAREL RE­TAIL

Ac­cord­ing to a re­port from the Bos­ton Con­sult­ing Group, In­dia is on its way to be­com­ing the third largest con­sumer econ­omy in the world, while an ASSOCHAM study es­ti­mates the re­tail mar­ket to be over USD 1.1 tril­lion by 2020, mak­ing it a cov­eted mar­ket for in­ter­na­tional play­ers. Ap­parel and fash­ion are ex­pected to grow as well, from USD 46 bil­lion in 2017 to USD 115 bil­lion by 2026 at a Com­pound An­nual Growth Rate (CAGR) of about 9.7 per cent. Given the po­ten­tial rev­enue float­ing in the In­dian mar­ket, there is no deny­ing that this move by the govern­ment is joy­ous to for­eign in­vestors. With the unim­peded ac­cess to 1.3 bil­lion con­sumers in In­dia’s re­tail mar­ket, wholly owned in­ter­na­tional brands no longer need to share their re­turns with lo­cal part­ners.

How­ever, from the In­dian per­spec­tive, there has been a steady in­ter­est in the In­dian mar­ket by ap­parel com­pa­nies for the last 10-15 years. With ma­jor Amer­i­can and Euro­pean brands con­stantly mak­ing head­way into the In­dian mar­ket ir­re­spec­tive of reg­u­la­tions and im­ped­i­ments, the ap­parel seg­ment isn’t ex­pected to be sig­nif­i­cantly al­tered. In fact, more than 19 per cent of the to­tal ap­parel mar­ket in In­dia is now a part of mod­ern re­tail sys­tems, while other seg­ments like food and gro­ceries only have a three per cent pen­e­tra­tion rate. The rel­a­tive ma­tu­rity in re­tail for ap­parel im­plies that large global brands and re­tail­ers are al­ready well on their way to In­dia while other cat­e­gories like food and fur­ni­ture are truly the growth av­enues for new money.

While it is pos­si­ble that some sin­gle brand ap­parel com­pa­nies will sever ties with their In­dian part­ners and take ad­van­tage of the 100 per cent FDI ben­e­fit, it isn’t cer­tain. Af­ter all, given the in­tri­ca­cies and com­plex­i­ties of the In­dian re­tail mar­ket, for­eign play­ers have al­ways found it use­ful to have a lo­cal part­ner. With thor­oughly vetted and time tested joint ven­ture agree­ments al­ready in place, the in­cen­tive to strike out alone with the 30 per cent sourc­ing re­quire­ment may not be in the in­ter­est of most ma­jor ap­parel com­pa­nies. The turn to in­de­pen­dence will mostly be seen in the largest of com­pa­nies, who have al­ready en­acted fully owned sub­sidiaries in In­dia and will wel­come this chance to be more flexible and en­force greater op­er­a­tional con­trol in the front end of their busi­ness.

THE WAY FOR­WARD

The ob­vi­ous ben­e­fits will, of course, be to small and medium sized sourc­ing part­ners as they will find more op­por­tu­ni­ties to sup­ply these

for­eign com­pa­nies. Given the shorter lead times, lower costs, and ease of ac­cess, sin­gle brand com­pa­nies will be hard pressed to build their value chain from scratch. How­ever, we have al­ready seen re­sis­tance to this ini­tia­tive from var­i­ous groups and as­so­ci­a­tions in the coun­try al­ready, such as Con­fed­er­a­tion of All In­dia Traders (CAIT) who have al­ready con­demned this move by the govern­ment. The ma­jor con­cern by CAIT is re­gard­ing the im­pact this will have on smaller busi­nesses which will be un­able to com­pete with ma­jor in­ter­na­tional brands.

This is a re­al­is­tic con­cern as we have al­ready seen the im­pact of such shifts in other coun­tries where multi­na­tional com­pa­nies have driven out lo­cal play­ers. How­ever, for the ap­parel busi­ness this may prove to be a prob­lem if many small traders are forced to com­pete over a large com­pany’s sourc­ing needs. This will not only risk driv­ing down their prof­itabil­ity but also lead to sig­nif­i­cant lay­offs. Un­der such an out­come, only large con­glom­er­ates within In­dia will be able to sur­vive. How­ever, it is too early to judge whether this is a guar­an­teed out­come as in the last three months we haven’t wit­nessed any se­ri­ous shifts or pro­pos­als emerg­ing from global ap­parel play­ers. The more likely out­come will sim­ply be a great ex­pan­sion of ex­ist­ing brands and the en­try of new ones–as they tar­get tier II and tier III mar­kets to grow their pres­ence. It is only when we start see­ing ma­jor man­u­fac­tur­ing plans from these in­ter­na­tional com­pa­nies will we truly see the fi­nal im­pact this pol­icy will have on the In­dian ap­parel mar­ket.

THE OB­VI­OUS BEN­E­FITS WILL, OF COURSE, BE TO SMALL AND MEDIUM SIZED SOURC­ING PART­NERS AS THEY WILL FIND MORE OP­POR­TU­NI­TIES TO SUP­PLY THESE FOR­EIGN COM­PA­NIES.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.