FDI in retail: Still time for reaction

Mon, 5 Aug Pre-Open

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The government recently made some changes to the foreign direct investment (FDI) policy for multi-brand retail. These changes mainly include relaxation of the policy in order to make the entry for the foreign retailers into India more viable from a long term perspective.

Changes have been made to three key conditions.

The first one being - the mandatory 30% sourcing of manufactured and processed products from small domestic industries. Such companies were earlier defined as those having a total asset base of US$ 1 m or Rs 50 m, and less. This definition has now been expanded to include companies having investments of US$ 2 m in plant and machinery. In case of situations when companies would cross this asset base, the condition would be not considered as long as the retail company continues to source from the same company.

The second condition is that of setting up back end infrastructure (which includes warehousing, logistic amongst others). As per the original condition, the retail chains are supposed to invest 50% of capital towards the back-end. And the minimum initial investment has to be of US$ 100 m. But what was unclear is the 50% investment in the back-end has to be on which investment - initial or total. The government has clarified such would be mandatory on the initial investment amount only.

The third condition that has been revised is opening up of stores in cities that do not necessarily have a population of more than 1 m. This would allow opening up of stores in states that do not have cities of large population. As per the Commerce Minster, 53 cities have a population of more than a million. He also added that twelve states have so far have allowed FDI policy in multi-brand retail.

Reaction good... but action still seems far away

These developments seem to have been welcomed by the interested parties. But in all probability, it would take some time before developments start to take place. This is on the back of the apprehensions of the foreign retails over the next year's election, given that some parties have expressed their reluctance over this policy. The key concerns also include possibility of closing down or less business for the small industry players and kirana stores and that they could eventually go out of business. However, as long as the government makes it a win-win situation for all - with the key aspects being well covered - it should not be a cause of concern.

However, an eye needs to be kept out for a concern that may crop up. This could be over the bigger players wanting to enter into this massive business opportunity. This could be possible by breaking up their business into smaller companies in order to qualify and grab a large chunk of the pie.