A Right Step
Allowing 51 per cent foreign direct investment in multi-brand retail per se is a step in the right direction. However, whether it will lead to actual inflow of FDI depends on many factors, says Dr. Arpita Mukherjee, professor, ICRIER.
The FDI in multi-brand retail depends on how easy or difficult it is for foreign retailers to adhere to the conditions associated with the policy, economic growth in India, whether FEMA regulations will be modified, how will Indian states react to this policy, etc.
Each application pertaining to FDI will go through rigorous scrutiny of FIPB. I personally feel that the policy, in its present form, is restrictive and unclear. For instance, if a foreign retailer starts procuring from a SME and then the business of the SME grows, can the foreign company continue to procure from the SME? Also, one of the conditions states that at least 50 per cent of the total FDI which will be brought in, should be in backend infrastructure, which includes logistics and storage. However, it excludes expenditure on land cost and rental. If a company is setting up a warehouse or cold storage, how can it not buy or rent land?
In India, the logistics industry is fragmented partly due to the structure of the industry and partly due to policy (for example, taxation policy). There is a need for integrated logistics services in India. If organised retail grows, it will definitely provide an impetus for the growth of the logistics sector since the demand for logistics will increase. If demand increases, it will be profitable to invest in this sector and the logistics sector will also receive investments. However, for the sector to consolidate and provide integrative services, there is a need for reforms like implementation of GST.
As I mentioned before, one of the conditions for entering the multi-brand retail segment is that at least 50 per cent of the total FDI should be in backend infrastructure which includes logistics and storage. Thus, it is expected that there will be some investment in backend. However, the policy is not clear whether the retailers will set up their own backend or use the services of established logistics players in India. In any case, the growth of organised retail will benefit logistics. If the inflow of FDI speeds up the growth of organised retail, it will definitely benefit the logistics sector.
I recommend that while there is a need to regulate the retail sector so that there is no anti-competitive practices, consumers are protected and zoning and other regulations are adhered to so that small retailers’ interest are not adversely affected. Also, there is no need to have undue regulations like restrictive sourcing conditions or backend investment requirements. If foreign retailers perceive a long-term interest in the Indian market they will themselves ensure that the backend is well developed. This will automatically lead to the development of the logistics sector. Too many conditions can act as a disincentive to investment.