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Obstacles for FDI in retail
Tue, 29 Nov Pre-Open

Despite serious apprehensions from opposition parties, the Government of India recently ended several years of policy logjam by allowing foreign direct investment (FDI) in retail. While this move could pave the way for foreign retailers like Wal-Mart, Tesco and Carrefour to invest into lucrative Indian markets overcoming logistical bottlenecks will be a key challenge for them.

Retailing is all about supply chain management. And while these retailing giants have strong expertise in it India will be a different market altogether. Poor road and rail infrastructure can create transportation inefficiencies. It may be noted that today in India approximately 30% of the produce is wasted due to logistical issues arising from traditional supply-chain network. Warehousing shortage and lack of cold storage chains is another area of concern. Although FDI can overcome these issues the initial road will be challenging as global retailers lack local expertise. Further, with Indian markets being fragmented and wide spread in nature they also have their own set of challenges.

Thus, while India appears to be an attractive investment destination for retailing giants it would be interesting to see how soon they are able to carve out a learning curve for themselves in a completely different market. It is interesting to note that there are many players in India who have not made money in this business despite changing consumer tastes and increase in standard of living - key drivers for growth. However, global players can bring significant scale advantage through bulk outsourcing which can be a win-win situation for both customers (price advantage) and themselves (higher profits due to bulk purchasing discount).

Apart from this guidelines for investment in back-end infrastructure will reduce wastage while mandatory sourcing requirements from small scale industries won't endanger their interests as well. However, with retail being a state subject it would be interesting to see whether opposition parties will ultimately allow FDI in their respective states for the fear of antagonizing their voter base.

Nonetheless, we believe that opening up of the retail sector was a bold move by the government which has been slightly slow on the reform curve agenda.

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