The recent decision by the Government to allow foreign direct investment in multi-brand retail is understandably the talk of the town.
The recent decision by the Government to allow foreign direct investment in multi-brand retail is understandably the talk of the town. There are various points of view regarding the impact it will have on the retail sector in specific and the Indian economy in general, but the decision is a big step in the direction of strengthening organized retail in the country. To get the complete picture, it is important to understand the situation which exists currently and how the new regulations are going to change the retail landscape.
Till recently, FDI in retail (except under single-brand product retailing, with conditions) was not allowed in India. In other words, for a company to be able to get foreign funding, products sold by it to the general public needed to be of a 'single-brand'. The government has now opened a gateway for foreign funding into the sector. In 1997, FDI in cash-and-carry (wholesale) with 100% ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51% investment in a single-brand retail outlet was also permitted in 2006. FDI in multi-brand retailing was prohibited in India.
This was changed to increases FDI in single-brand retail to 100% while creating a path for FDI in multi-brand retail to the tune of 51%. Cities with populations of more than 10 million are eligible for this. With yesterday's announcement, 51% FDI has been permitted in multi-brand retail - with certain caveats, and also subject to final the approval from respective states to allow implementation within these states.
There are still some apprehensions on how this policy will be implemented due to the given caveats. However, it does signify a strong positive outlook for this sector.
The retail sector in India has been plagued with problems at all the areas of its life cycle - back end, technology, supply chain, real estate and human resources. There has been a lack of investment in all of these areas. Consequently, the retail sector has not been able to match the pace of other growing sectors in India. There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Lack of Storage infrastructure has been one of the most alarming of these infrastructure gaps.
The technology being used in Indian retail is largely obsolete and does not meet international standards, resulting in poor efficiency at the supply side and average consumer experience on the demand side. Intermediaries often bypass the ‘mandi’ norms and their pricing lacks transparency. The public procurement and distribution system calls for a lot of improvement. In spite of heavy subsidies, overall food based inflation has been a matter of great concern.
FDI will be a powerful catalyst to the required growth in the retail industry and, in long term, will prove beneficial to all the major stakeholders. The new policy can benefit both foreign retailers and their Indian partners. The benefits to foreign players will be access to local market knowledge and an increased consumer base, while Indian companies will benefit by global best management practices and technological know-how. There will be investment in storage and transportation infrastructure, technology and supply chain operations.
The increased flow of capital, if used effectively, will benefit both the farmers and the consumers. Farmers will benefit from the better price indexing and direct selling to the retailer. The consumer, in addition to having a better shopping experience, will benefit from the competition and the resultant reduced prices.
The real estate retail industry will benefit immensely due to increase in demand and increased investor confidence. We can also expect increased transparency in the retail real estate sector. Additionally, the country will flourish in terms of quality standards and consumer expectations, since the inflow of FDI into the retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments.
In the light of above, it would be prudent to encourage FDI in retail further. Of course, sufficient consideration should be given to the interests of SMEs, farmers and consumers while finalizing this decision.
With this move, along with the caveats, the Government has indeed taken an important step. From a retail real estate point of view, it will be open up immense opportunities in the medium and long term, as the demand for quality real estate will rise. Currently, some retailers are cash-strapped and this will provide a sort of bail-out option to them. Overall, the investment by local and new international retailers that are likely to flow into the sector will definitely also take the form of investments into real estate at the front end in terms of retail store spaces and of the back end in terms of better quality warehouses.
The new international entrants will be willing to take longer term bets and invest in stores which will be sustainable over the long haul. Competition will increase as Indian retailers shape up and intensify their expansion plans - which had been fairly low over the past few years. Also, it will increase the interest and confidence level of real estate developers to set up quality shopping centres. They now have reason to set behind them their experiences post 2008 and can once again consider investing in this asset class with a clear vision to long-term profit.