FDI IN RETAIL−DISSECTING THE REALITY
On December 5th 2012 and subsequently on December 7th 2012, the Lok Sabha and Rajya Sabha approved FDI in multi−brand retail respectively through voting. It was after a gap of many years that an executive decision of the government was put to vote in Parliament. BJP, the major political party against the proposed FDI policy of the government witnessed its stand defeated in the Parliament. While leader of the Opposition Sushma Swaraj lamented the approval stating that the government "won technically but lost on moral grounds". The commerce minister Anand Sharma mentioned that out of 21 states which responded to the Centre’s communication on the FDI issue, 11 supported them in writing. Sharma further observed, "No one can take away the right of an elected government to take decision" apart from mentioning, "Consensus means general agreement and not unanimity." The voting on the FDI issue and the subsequent approval has put an end to the long drawn debate on the FDI in multi−brand retailing issue. The government’s move to raise the cap of FDI in multi−brand retailing to 51% has been a topic of heated debate in various circles. The matter has witnessed enough of politicizing in recent months that has only added to the dilemma surrounding the matter among the masses. It needs to be understood over here that although FDI in retail is mostly opined to benefit the Indian populace, the government should not wholly and solely depend on FDI for the overall development of the retail industry as such. As on date, the government has already implemented 100% FDI in single brand retailing which has triggered the proposed entry of IKEA in India. In the context of FDI in multi−brand retailing, the government at the Centre has to take certain important decisions and initiate certain crucial activities that will allow holistic returns to retailers, producers and customers from the enhanced FDI in retailing.
FDI Proposal & Present Scenario
Let us first look at some of the salient aspects of the FDI proposal put forth by the government of India: At least half of the FDI should be made in back−end infrastructure such as warehousing. The minimum FDI in any multi−brand retail project should be $100 million (INR 450 crore). State governments can prohibit FDI in retail if they wish to. Stores can be set up only in cities with a population of at least one million. At least one − third of the sales should be made to small retailers. At least 30% of the sales should be made to small retailers, either directly or through wholesale units set up for this purpose. States will be empowered to put conditions for integrating small retailers and kirana merchants in the value chain. At least 30% of the value of manufactured items procured (excluding food items) should be sourced from small and medium enterprises. States will be empowered to set up framework for monitoring compliance with these conditions. This will enable Walmart, Tesco and Carrefour to set up deep discount stores in India.
As it can be found that there are certain aspects of the FDI proposal that have allowed the matter to escalate over a period of time. Empowering the states in the said matter has created a great political divide where each regional or national party is leveraging the matter for their own political mileage. Those states that are presently in favor of the FDI proposal are Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Odisha, Uttarakhand, Haryana, Manipur, Daman & Diu, Dadra & Nagar Haveli while states like West Bengal, Bihar, Karnataka, Kerala, Madhya Pradesh and Tripura are against the proposal. The state of Jammu & Kashmir has reportedly been found to endorse the policy but then they haven’t given their assent in writing. [Exhibit−I.I] highlights the stand of various major political figures as far as enhanced FDI in multi− brand retailing is concerned.
The size of organized retail in the country was $20 billion in the year 2010. In the year 2011, it was reported that while the overall retail market was valued at $ 4450 billion, organized retail was about 6% of the value. Analysts further observe that by 2015, value of the overall retail industry will reach $ 720 billion with the share of organized retail expected to reach 9%−10%. It is reported that till date FDI in single brand retail has been received to the tune of $ 45 million. If we take a closer look at share of various product categories in the retail market, we find that ’clothing’ as a category leads followed by ’durables’ and ’foods & beverages’. It is further believed that the true potential of the Indian retail industry can be reached by going for enhanced FDI in the retail sector [Exhibit−I.II (a) and (b)].
Research studies have revealed that the states of Delhi, Maharashtra, Andhra Pradesh, Gujarat and Tamil Nadu have the highest penetration of modern retail outlets. It is further interesting to find that significant percentage of modern retail outlets is existing in various non−FDI compliant states (Exhibit−I.III)
If the present scenario regarding FDI in retailing is looked at, it is observed that while the various political parties and political personalities are rubbishing the claims being made by the Congress led UPA government at the centre, the government is determined to go ahead with implementation of the FDI proposal for multi−brand retail. In this context, it has been found to publish advertisements in various newspapers and in various other mass media vehicles stating the benefits of enhanced FDI in multi−brand retail. The advertisements talk of benefit to farmers due to 50% investment by retail chains in the development of back−end infrastructure. The ads further state that FDI in retail will help in the creation of lakhs of jobs and will also serve the greater interests of the customers. However political parties like the BJP and BSP have alleged that the Congress government at the centre is trying to introduce videsi sentiments by and large.
Indian multi−brand retailers have been found to be quite enthused with the idea of 51% FDI in multi−brand retail and there are many who have expressed their thoughts about splitting their businesses to induct foreign partners in the states where FDI policy is being encouraged. Sanjiv Goenka of the RP Sanjiv Goenka Group has been one such personality who is toying with the idea. However one concern that faces him is that some 60% of his outlets are in the 11 states where FDI policy has been opposed. People at Future Group also have seen merit in the idea of clubbing retail stores and other assets located in states favoring FDI where a foreign company can pick up equity. Rajiv Luthra of Luthra & Luthra law firm mentions, "A new foreign retailer can always forge an agreement in a way where the Indian partner opens stores in states opposed to this decision while the joint venture opens in states not opposed to it. Once
the ban is lifted, foreign retailer can buy into the Indian partner’s company."
THE REALITY CHECK
Let us now look into certain brighter aspects of the government’s proposed FDI policy and the areas of concern and doubts. In India, the Bharti Wal−Mart’s direct farm program has seen retailers associating themselves with activities like soil testing for nutrient levels to capture deficiencies and mapping of agri−input requirements with the help of agronomists to ensure quality of produce. The outcome of which has been that incomes of farmers have risen by 7%−10% in the last few years. However in this context, Arvind Singhal of Technopak observes, "Modern retail, whether it is local or foreign, cannot make a huge and immediate impact on farmers, the real change will happen by bringing about reforms in the agriculture sector." There are certain reforms required for the various past legislations that have been found to create hiccups as far as realizing the full potential of the FDI policy is concerned. The Essential Commodities Act which restricts the quantity that one can purchase, store or move across the borders of a state is one. Then there is the Forward Contracts Regulation Act that influences derivative trading of futures and options. With these kinds of restrictions in place, it is difficult to scale up for the retailers or the producers. While the domestic retail industry has welcomed the FDI policy and has endorsed the government’s view point that the said policy will benefit farmers and consumers, there are many who feel that the real positive effect will not take place till the time reforms in the Agriculture Produce Marketing Committee Act and a unified Goods and Services Tax are made.
There are many who opine that organized retail in the country will help counter food inflation and bring down prices. However experts maintain that presently the share of organized retail pie in the country that stands at around 7% is too miniscule and when it comes to foods, the impact of organized retailing is even lesser. So in the next 10 years or so, the overall impact of organized retailing on agriculture and consumer price inflation control will be minimal. It is only after some 15−20 years that consumers and farmers can hope to see some real benefits and by that time the reach and share of corporatized retail will be close to 35%.
Further, when it comes to foreign direct investments, while the FMCG MNCs will need to invest in plant, machinery and marketing, retail entities like Walmart and Carrefour will require investing in large tracts of land and that will be a critical issue. The foreign retail majors may have the willingness to invest big but then they in all probability will not have the patience to wait for 15− 20 years for their investments to break−even.
So as we see, FDI in retail has its advantages but then there are certain issues that are to be considered and worked upon so that FDI is acceptable to a wider section of the Indian populace. As far as politicizing the matter is concerned, that is needless and least called for since the proposal as such is sure to benefit a greater cross−section of the society. While the BJP mentions that FDI in multi−brand retail will create more sales boys and sales girls in the country, Anand Sharma of the Congress counters, "By saying that FDI in retail will create sales girls and sales boys, BJP is disrespecting those who earn their living selling products in shops not owned by them." These sorts of needless verbal duels can definitely not facilitate the understanding of the nuances surrounding FDI in retail issue. Instead of fighting for political gains, the political parties need to work more cohesively to eradicate issues that are causing a roadblock to the overall development of organized retailing in the country. The retail sector as such is looking for investments but then the global players need to get clear policy directions to take a calculated move as far as investing Indian retailscape is concerned. The observations of Debashish Mukherjee of AT Kearney best summarizes the issue as he opines, "To begin with, the most visible change will be that foreign retailers will start setting up stores and have front−end presence, organized retail will see consolidation and simultaneously people will see a lot of development in supply chains. We need to look at the investments from a long term perspective. Benefits will come about for farmers and consumers but a whole host of other reforms need to be in place too. However, this is the first step in that direction."