Through FDI in Single Brand Retail
Dr Ranjeet Mehta
India is among the top 10 economies (by GDP) in the world, and it is poised to become the 3rd largest by 2030. The Government has radically liberalised the Foreign Direct Investment (FDI) regime, with the objective of providing major impetus to employment and job creation in India. In a sweeping overhaul of foreign direct investment norms across nine key sectors, the government in June this year eased FDI caps for defence, aviation and food processing sectors.
India’s consumer market has experienced unprecedented growth in the last decade. This trend is expected to continue, and India is likely to emerge as one of the fastest-growing economies in the world. A favourable demographic profile and rising income levels would be the key drivers of this inclusive growth. As a result, the US$500-billion Indian retail market is expected to grow at a Compound Annual Growth Rate (CAGR) of 12 percent to reach a value of US$900 billion by 2017. The relevant organized market, which is currently valued at US$35 billion, is expected to grow at a CAGR of 21 percent, to reach a size of US$90 billion by 2017.
The Indian organized retail market is in the growth phase, and the associated stakeholders — retailers, consumers, vendors, mall operators and regulatory bodies — are evolving simultaneously. Single-brand retailing is primarily driven by categories such as apparel and accessories, footwear, which account for more than one third share of the organized retail market.
Retailing in India is one of the pillars of it’s the economy. The Government has decided to permit 100 per cent FDI under the government approval route for trading, including through e-commerce, for food products manufactured or produced in India. The government had in the Budget for this fiscal announced that 100 per cent FDI would be allowed through the Foreign Investment Promotion Board (FIPB) route in marketing of food products produced and manufactured in India. Local sourcing norms for single-brand retail trading have also been relaxed for products deemed as having ‘state-of-the-art’ and ‘cutting edge’ technology. After the tweaking of norms, entities undertaking single-brand retail trading and seeking exemption from local sourcing norms for ‘state-of-the-art’ and ‘cutting edge’ technology can get waiver for three years, with the option of extending it by another five years. Earlier, there was no time limit for exemption from local sourcing norms.
The relaxation for local sourcing norms for single-brand retail trading could pave the way for many companies including Apple Inc to open its retail stores in India. Now the question is can the brand owner or non-resident entity/entities undertake single brand retail trading of the specific brand through more than one company in India? Department of Industrial Policy & Promotion (DIPP) has clarified that a non-resident entity or entities, whether owner of the brand or otherwise, shall be permitted to undertake ‘single brand’ product retail trading in the country for the specific brand, directly or through a legally tenable agreement with the brand owner for undertaking single brand product retail trading. Such non-resident entity or entities can undertake single brand retail trading business through one or more wholly owned subsidiaries or joint ventures.
India’s FDI inflows in 2015-16 increased to $55.46 billion as against $36.04 billion during 2013-14. It is significant to note that the government last made changes to the FDI policy in November 2015, when norms for 15 sectors including banking, defence and construction were changed.
FDI can make a difference in economic life of India
A remarkable inflow of FDI in various industrial units in India boosts the economic life of country. It provides an opportunity for cash-deficient domestic retailers to bridge the gap between capital required and raised. In fact FDI is one of the major sources of investments for a developing country like India wherein it expects investments from Multinational companies to improve the country growth rate, create jobs, share their expertise, back-end infrastructure and research and development in the host country. It has also been noted that foreign direct investment has helped several countries when they faced economic hardship. An example of this can be seen in some countries in the East Asian region (Indonesia and Thailand). It was observed during the 1997 Asian financial crisis that the amount of foreign direct investment made in these countries was held steady while other forms of cash inflows suffered major setbacks. Similar observations have also been made in Latin America in the 1980s and in Mexico in 1994-95.
Improvement of supply chain/ distribution efficiencies, coupled with capacity building and introduction of modern technology helps arrest wastage. In the present situation improper storage facilities and lack of investment in logistics have been creating inefficiencies in food supply chain, leading to significant wastages. We have to accept that India is not up to the mark at supply chain management, be it PDS or private and foreign expertise only helps to improve it for good.
Though India is the second largest producer of fruits and vegetables, it has a very limited integrated cold-chain infrastructure. Lack of adequate storage facilities causes heavy losses to farmers, in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. With FDI, there could be a complete overhaul of the currently fragmented supply chain infrastructure. Extensive backward integration by multinational retailers, coupled with their technical and operational expertise, can hopefully remedy such structural flaws. Also, farmers can benefit with the “farm to fork” ventures with retailers which helps (a) to cut down intermediaries ; (b) give better prices to farmers, and (c) provide stability and economics of scale which will benefit, in the ultimate analysis, both the farmers and consumers.
Consumers in the organized retail have the opportunity to choose between a numbers of internationally famous brands with pleasant shopping environment, huge space for product display, maintenance of hygiene and better customer care. There is a large segment of the population which feels that there is a difference in the quality of the products sold to foreign retailers and the same products sold in the Indian market. With increasing spending power in an emerging country, there is an increasing tendency to pay for quality and ease and access to a “one -stop shop” which has a wide range of different products. FDI definitely challenges the monopoly of certain domestic Indian companies and the ultimate benefit goes to the end-consumer.
The entry of the many multinational corporations obviously promises intensive competition between the different companies offering their brands in a particular product market (including domestic companies), thereby resulting in availability of many varieties, reduced prices, and convenient distribution of the marketing offers. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Some may argue because of FDI, big businesses will destroy local economies by displacing many people affiliated with small businesses, including shopkeepers, hawkers, vendors, and workers. For a country with size and plural cultural, ethnic and linguistic population fragmentation of retail business will always be present.
Several studies have pointed out the benefits of allowing global retail chains in the multi-brand retail sector. The overall impact of modern retail on the economy is immense. A report by the Boston Consulting Group showed that nearly three to four million direct jobs will be created while another four to six million indirect jobs would be available in the logistics sector, contract labour in the distribution and repackaging centres, housekeeping and security staff in the stores. Government estimates show that nearly one crore jobs would be created in the sector. The entry of foreign companies into Indian Retailing not only creates employment opportunities but also ensures quality in them. This helps the Indian human resource to find better quality jobs and to improve their standard of living and life styles on par with that of the citizens of developed nations.
However there are views that FDI in retail definitely strengthens organized retail in the country. These organized retailers will tend to dominate the entire consumer market. It leads to unfair competition and ultimately results in large-scale exit of domestic retailers, especially the small family managed outlets.
The government has made it easier for single brand retailers to setup operations in the country with an extended window of eight years before the application of the local sourcing norms come into play. However, few companies like Apple Inc. which were hopeful of getting a complete relaxation of sourcing norms on the grounds that they are a “state-of-the-art” and “cutting-edge technology” company. Under earlier rules for single brand retail, companies opening wholly-owned stores in India were required to comply with the local sourcing norms of 30% within five years of their first store opening. This rule has been further tightened for entities undertaking single brand retail trading and seeking exemption from local sourcing norms will get a waiver only for three years along with a relaxed sourcing regime for five more years.
Yet, on the whole, the government has made it easier for retailers setting up under 100% single brand policy. It also notified the 100% FDI under approval route for trading, including through e-commerce for food products manufactured or produced in India which it had proposed during the Budget. As such, companies manufacturing food products in India will be allowed to set up retail stores and even have e-commerce operations in respect to the items manufactured in India. FDI in food retail is a very progressive step feels the Industry as it will lead to retail innovation and enhance the competitiveness of Indian companies thru access to global designs, technologies and management best practices. Opening the single brand retail to global competition is expected to spur a retail rush to India and create thousands of job opportunities.
(The author is Director, PHD Chamber of Commerce and Industry New Delhi. email : email@example.com)