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FDI in Retail Still Not a Dead Horse

Posted: Wednesday, 11 April 2012 14:14

FDI in Retail Still Not a Dead Horse

Apr 11 : Despite several reservations on the issue, the UPA coalition government has rejuvenated its efforts to create a consensus on allowing foreign direct investment (FDI) in retail, with the Department of Industrial Policy and Promotion (DIPP) reportedly holding consultations with all stakeholders to reach a consensus in the matter, Commerce and Industry Minister Anand Sharma has said.

Conceding that some states have reservations about FDI in retail, the Minister said that there are a few others that are actively seeking their entry. He hopes that soon a consensus would be reached so that states which are eager to invite them may be able to start. Hinting that the decision may not be unanimous, he said that consensus does not mean unanimity; it would be unfair to expect in a diversified country like India.

Only a few weeks after announcing the policy to allow 51% FDI in retail , the government had to  put it in abeyance in November last year, following stiff opposition from several state governments with opposition in the driving seat, as well as its allies. The Minister had emphasized then that the suspension was just a pause in implementing the decision and did not mean that the order was being scrapped.

The government had announced in January 2012 that 100 per cent FDI in single brand retail would be allowed. But the 30 per cent mandatory sourcing from small and micro scale enterprises  (SMEs) regulation made many –like Apple, IKEA, Nike and Reebok develop cold feet. The government is now expected to modify the guidelines to ensure that foreign retailers can have long term relationship with micro and small enterprises. The sourcing clause would be removed for those single-brand retailers who can prove that it is not possible to procure from local small enterprises because of technology constraints or product sophistication. The industry ministry had  received feedback from companies like IKEA, Nike and Apple that they were unlikely to invest in India until the sourcing norms were simplified.

Nike officials have told the government that the needed to invest in  the small scale industries  and upgrade technology and scale up capacity. But doing so would breach the small scale cap of $1 million  investment in plant and machinery, set many years ago. International retailers have expressed concerns over the lack of clarity on this condition. They have suggested that the condition should be modified so that they can continue to procure goods from the same vendor even after it loses its SME status because of higher investments.

Current rules make it mandatory for all single-brand retail companies with more than 51% foreign holding to source at least 30% of the total value of their products from Indian small or cottage industries, artisans and craftsmen.

Meanwhile, opposition to government’s announcement of allowing FDI has also come from an expected quarter. Yoga TV Guru Baba Ramdev who is against the entry of foreign companies making colas to cars, has raised a voice against the entry of Foreign Direct Investment (FDI) in the retail sector, claiming that FDI in retail would leave 50 million people unemployed. "With the entry of foreign companies and foreign direct investment in the retail market, at least five crore people will lose job and become unemployed.  When the money, brain, shops, vendors, customers, factories, resources are available with us, why should foreign companies benefit?," asked Baba Ramdev reportedly.

Indian Wine Academy is a supporter of the concept of FDI in retail as it will help availability and visibility of wines at the counters. The opening of FDI in India’s multi-brand retail would enable global giants like Wal-Mart, Carrefour and Tesco, to open their supermarket chains in India. Although Indian chains like Spencer’s, Spar and Reliance already sell wine but they are not aggressive enough and may not be a match to these foreign retailers because of the expertise they have developed during the past years. It is also implicit that they would be able to squeeze the prices of producers and importers because of their stronger purchasing and negotiating power They already have tremendous clout in the other existing markets and may drive out smaller retailers out of wine selling business.  Nevertheless, the consumer is benefitted by their presence, government also being a gainer because of increased revenues.


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