FDI in retail: The argument continues... - Views on News from Equitymaster

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FDI in retail: The argument continues...

Mar 25, 2011

In our earlier articles we made an effort to simplify a couple of budget announcements with respect to retailing and explained how these affect the retail sector. Firstly, we discussed the impact of newly imposed excise duty on retail and then the basics about GST and its impact on retailers. In continuation of our endeavour, we will take up another very important regulation which when implemented will alter the retail landscape altogether - FDI in multi brand retail. The next two articles will focus on this.

Although the latest Union Budget did disappoint the retail industry with no specific announcement on the much awaited FDI in multi brand retail, the finance minister in his budget speech focused on some issues that can be best dealt with by opening of the retail sector. So is FDI in retail in the offing in the near future?

Our finance minister remarked that at present 40% of the fruit and vegetable production in India is wasted. This he believes is on account of lack of storage, cold chain and transport infrastructure. These deficiencies in our supply chain management became even more evident in the recent high food inflation scenario. He also pointed out at the huge difference between wholesale and retail prices and between markets in different parts of the country.

A number of initiatives were announced by the government aimed at strengthening of storage and warehousing infrastructure. While these initiatives are likely to address the issues, foreign direct investment in retail is what India needs. It will provide assistance in the form of capital, technology knowhow and expertise by the global retailers.

The story so far

In 1993, the then finance minister had changed the law to permit FDI in retail trade. But, it was banned in 1996 on political concerns of the ruling United Front government. In 1997, FDI in cash and carry business was allowed up to 100% under the approval of the government. In 2006, it was brought under the automatic route. In the same year, FDI in single brands was permitted with prior government approval and the limit was set to 51%. Since the past few years, the Indian government has been mulling over opening foreign investment in multi-brand retail. But, the political controversies along with the protests from unorganized sector (smaller kirana stores) have delayed the policy so far.

Present regulatory framework
Nature of business Limit
Wholesale cash and carry 100%
Single brand retailing Up to 51% with Government approval
Multi brand retailing Restricted

In the next article we will discuss the arguments for and against FDI in retail, how it will impact the Indian retailing industry and the views of industry experts on the same.

Source: IBEF, DIPP

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