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Retail FDI Story reaches Final Chapter

Posted: Monday, 13 June 2011 11:25

Retail FDI Story reaches Final Chapter

June 13: After years of dithering and deliberations the government is finally contemplating to allow Foreign Direct Investment of up to 51% in Retail but with several riders including the mandatory investment of at least half of the investment in back-end infrastructure and operations, but the decision may not come as early as the media has been predicting, primarily because of political compulsions.

The Commerce Minister Anand Sharma said on Friday that the government had not taken the final decision on the issue of allowing Multi-Brand Retail through FDI. But an inter-ministerial group led by Kaushik Basu, chief economic adviser in the finance ministry, is reported to have moved a formal proposal to allow foreign direct investment in multi-brand retail.

A significant reason to allow FDI is touted to be controlling the food price inflation. The data released by the government on Thursday shows that the inflation in food items crossed 9 % while it was 8.06% a week earlier.

When the policy is finally announced it is expected to be with several riders and conditions, the most significant one being the mandatory 50% investment in the back-end infra- structure, including cold storage chain and warehousing.

The minimum FDI to be invested would be $100 million. Retail stores will be set up in cities with populations of more than one million with a provision that the area within 10 kms around the city could be included in the calculations. Moreover, front-end retail operations will be allowed only in the states which agree to allow FDI in multi-brand Retail.

Another important condition that is likely to be imposed, refers to minimum sales of 30 per cent to be made to small retailers directly or through wholesale cash-and-carry units set up for this purpose. These retailers will have to keep the RBI and the Foreign Investment Promotion Board informed about the compliance.

State governments may also impose conditions to integrate the small kirana merchants, the mom and pop stores which are threatened to extinction.

Delay due to Political Compulsions

The delay, as reported earlier by delWine has been mainly because of political reasons. Mrs. Sonia Gandhi, President of the Congress party has advised the government to move cautiously in opening up FDI in Multi-brand retail since it could hurt kirana, the neighbourhood grocery stores. To safeguard their interest, the proposal also makes it mandatory to source a minimum 30% of the value of manufactured items, excluding food products from the small and medium enterprises.

The government may face tough opposition before fully opening up the market to these foreign companies to enter retail. Ravi Shankar Prasad, National General Secretary and Chief spokesperson of BJP, was quoted as saying that the giant stores would affect the neighbourhood mom-and-pop stores and street vendors. ‘We oppose it because it will lead to large-scale unemployment,’ he said.

There has been no consensus between various government departments and ministries on the issue yet. The ministry of Agriculture, Food Processing Industry and Planning Commission fully support the FDI. But The Department of Consumer Affairs supports their participation up to only 49 % . The department of pharmaceuticals says that FDI should be included for the study on regulatory environment. The department of economic affairs is still holding some cards close to its chest and is awaiting the inter-ministerial consultations, before the draft policy is submitted to the Cabinet for consideration.

International retailer giants like Wal-Mart , Carrefour and Tesco have been trying to influence the Indian government towards the liberalisation in the $450 billion retail sector to foreign investment for quite some time and are already present in India in one form or the other, waiting for the policy decision.

Meanwhile, Retail stocks, led by Shoppers' Stop, rose by up to 10.52 per cent on the Bombay Stock Exchange on Friday after media reports that the government will soon allow 51 per cent foreign direct investment in the multi-brand retail sector. Pantaloon Retail India settled higher by 6.87 per cent at Rs 285.30, while Trent jumped by 4.98 per cent to close at Rs 1,109.55.

The policy change will certainly have a positive advantage for the wine industry. These multi-nationals are already selling wines in their chains of supermarkets and will sooner or later dominate wine retail sales in all states where they will be allowed to add them to their portfolios.

The FDI story has reached the final chapter but in India the distance between the cup and the lip can be longer than it appears. It may be months before one can say- Cheers!


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