CRISIL's report on foreign direct investment (FDI)
The Indian government permitted foreign direct investment (FDI) in multi brand retail in November 2011, which was cleared by the Union Cabinet in September 2012. On June 6, 2013, the government has issued further clarifications on its policy, specifically relating to the mandatory investments and sourcing requirements to be met by foreign retailers investing in India. CRISIL Research believes that irrespective of these clarifications, foreign multi brand retailers are unlikely to make significant investments in India over the next two to three years.
Uncertainty in both the global and Indian economies will delay the entry of foreign players in Indian retail in the short term. Growth in India’s organized retail market has slowed down to 10 per cent in 2012-13, from an average 20 per cent growth seen during 2009-10 to 2011-12. Although this growth is expected to pick up, it will remain moderate at about 14-15 per cent over the next two years (2013-14 and 2014-15). Further, many global retailers are facing pressures on profitability in their home markets, and are unlikely to commit aggressive investments in foreign markets in the near future.
Moreover, the sourcing and back-end investment requirements being laid down are worrisome for foreign retailers operating in retail verticals apart from food & grocery, as segments such as apparels and electronics do not require huge back-end investments.
Further, the unstable political climate in India, impending the parliamentary elections of 2014, will lead to a delay in investments by foreign retailers. In the event a retailer decides to invest, it will be another 2-3 years before the retailer can roll out greenfield back-end and front-end infrastructure needed for a sizeable scale of operations.
Impact: The government is yet to clarify on whether the mandatory investment of 50 per cent in back-end infrastructure would need to be on the cumulative investment basis or only on the minimum investment. The current policy implies that, of the minimum investment of USD 100 million, investments in the front-end and back-end infrastructure will have to be USD 50 million each.
Our analysis shows that an investment of USD 50 million can support 1 million square feet of front-end space, equivalent to 10-15 hypermarket or departmental stores. Whereas, the minimum specified investment of USD 50 million in back-end infrastructure can support a significantly larger front-end space of 15-18 million sq ft. Hence, we believe, that this clarification is important before retailers can firm up their plans for entering India.
Moreover, as per the clarifications, foreign retailers entering India will have to commit green field investments in both back-end and front- end for at least USD 100 million. This, we believe, will involve a lead time of two to three years for identifying appropriate store locations and rolling out back-end infrastructure before the retailer can start operations on a sizeable scale.
CRISIL Research believes that as organized retail companies already source a significant portion of their private label merchandise (especially in the food and grocery segment) from domestic MSMEs, this stipulation is unlikely to deter investments in the food and grocery space. (Private labels accounted for 15-20 per cent of the sales of large organized retailers in 2012-13.). However, this clause is likely to be a deterrent for investments by multi brand retailers in other verticals such as apparels and electronics ,where sourcing from MSMEs may not be feasible.
Disclaimer: CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL Limited has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. The Centre for Economic Research, CRISIL (CCER) operates independently of and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular operations obtain information of a confidential nature that is not available to C-CER. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.
© CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"