FDI in retail: The much-needed booster shots are here

During the last financial year, India attracted $5.64 billion in FDI from Mauritius, according to the data by the Department for Promotion of Industry and Internal Trade (DPIIT)

Highlights:-
- Sourcing for exports will be considered as domestic purchase
- Single-brand foreign retailers can start online operations right away - FDI in multi-brand is still not permissible

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Retail has seen immense FDI (foreign direct investment) interest over the years. However, of late, market and business sentiment has been pretty weak in India. This discouraged foreign companies from investing in the country.

To gain access to the much-needed capital and rebuild India's image as a preferred investment destination, the government on Wednesday tweaked FDI norms in the sector.

Part 1 - Changes to the existing regulations

The past

In single-brand retail, 100 percent FDI through the automatic route was permissible only for products sold by a foreign retailer within India with the condition that at least 30 percent are sourced from Indian suppliers alone.

The quantum of 30 percent would be looked at from a 5 -year block perspective. For instance, in the first year, if the foreign retailer had sourced only 5 percent of the goods it sold domestically, it can make up for the 25 percent deficit by sourcing a higher chunk of goods from the same/other Indian suppliers in the following 4 years.

The revision

From now on, even those goods that have been purchased by the foreign retailer from Indian suppliers for exports would be taken into account while calculating the 30 percent figure.

The impact

While this is obviously a sign of respite for the foreign retailer, Indian suppliers who deal with them get a chance to boost their export potential.

Part 2 - Inclusion of a new provision

Foreign retailers have been granted the right to commence selling their products online in India without the need to have brick-and-mortar outlets right at the outset. The physical stores can be set up later in due course.

Earlier, online trade by foreign retailers was disallowed if they didn't have offline presence.

At a time when convenience and remote shopping is picking up rapidly pan-India, this paradigm shift in stance was much needed. Consumers stand to benefit from a wider range of products at different price points.

What can one decipher from this?

Since single-brand foreign retailers operating in India are already complying with the 30 percent rule, there would be no ground-breaking positive impact on their operations.

Keeping in mind the interests of the wider retail community in India, multi-brand retail has been left out by the announcements. As a result, foreign retailers that sell a wide range of brands across different product categories would not be able to enter the Indian market under the 100 percent automatic FDI route.

The above-mentioned series of measures undoubtedly augur well in terms of how India is perceived by international majors. Therefore, we could continue to see increased FDI activity in this space in times to come.

While long-term prospects of Indian retail remain convincing, resolution of macroeconomic hurdles (associated with lack of liquidity and weak consumption) will be pivotal to reviving growth in the foreseeable future.

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