Opinion How the NDA made the case for up to 100% FDI in retail,a decade back

As a result of the underdeveloped retail sector,India is losing out on many opportunities of growth and employment generation. The disadvantages of underdeveloped retail sector are:

a) Consumer deprived of price advantage,choice,variety and quality

b) Outbound shopping tourism

c) Sub-optimal growth

d) Employment opportunities not fully tapped

e) No back-end drive to streamline upstream processing and distribution logistics

f) Low value addition

Notwithstanding the above limitations,the retail sector in India is reported to be enormous. As per a recent McKinsey study (India: The Growth Imperative,2001),with reforms retail productivity can increase by 2.5 times and annual output by 12 per cent,creating 8 million jobs. One of the effective means of doing this would be to open the retail sector to foreign investment.

Empirical evidence shows that FDI in retail trade has a positive impact on growth and productivity in the sector. The advantages are as follows:

a) Huge capital infusion by foreign investors,as modern organised retail business involves substantial investments in real estate,storage and transport logistics,IT applications,marketing and merchandising,etc. FDI in retail trade accounts for a substantial share in total FDI flows of many countries,such as Brazil,Argentina,Mexico,Chile,Poland,Indonesia,Thailand,etc. Even China permits FDI in retail trade through joint ventures with local partners.

b) A direct fallout of huge FDI in this sector would be employment generation,both direct and indirect. Notwithstanding the capital intensity of modern retail business,it also continues to be labour intensive. For example,however modern a retail store may be,cash counters would still be manned by people. Also sales assistants cannot be replaced by automation. Growth in retail business would undoubtedly generate additional employment. Similarly,it would also lead to creation of indirect employment in support activities throughout the supply chain starting from producers to packaging,storage and transport.

c) Enhancement of productivity and efficiency gains through introduction of modern technology and management skills,compression of distribution chain and adoption of global best practices. The small urban and rural counters and street vendors would continue to dominate the sector. However,the productivity in the organised sector alone is expected to match global standards. This would arise mainly out of supply chain efficiencies and competition.

d) A direct fallout of higher productivity would be lower prices of goods,which would directly benefit consumers.

e) Lower prices and marketing skills would stimulate demand and consumer spending. The middle-income and low-income customers have a very high price elasticity of consumption and a 8-9 per cent price reduction across the board can trigger increased demand in consumer goods.

f) Development of upstream activities is closely linked to investments in the retail sector. A strong FDI presence in the retail sector would act as a driving force in attracting FDI in upstream activities as well,especially in food processing and packaging industries. They also motivate their worldwide suppliers to set up business in the new location to maximise the advantages of localisation in terms of production costs.

g) Improvement in tax realisation due to increase in the percentage of organised business and growth in retail sector as well as upstream activities.

Apprehension has been expressed in some quarters that allowing FDI in retail trade would lead to unfair competition and ultimately result in large-scale exit of domestic retailers,especially small family-managed outlets. Similarly,apprehension has also been expressed in some quarters that global retailers would not source products from Indian manufacturers,particularly SSI units,and would use India as a dumping ground for substandard or outdated products. These apprehensions need to be viewed in the light of the following:

a) Bulk of the retail outlets in the unorganised sector cater to the lower income segment where the product range is quite different from that of the organised sector and the consumers just do not have the upward mobility to switch over to organised retail outlets.

b) The domestic organised retail trade sector will actually benefit from efficiencies developed upstream and from modern technology and management practices. A case in point here are fast food retail chains. The entry of McDonald’s,Pizza Hut,KFC and their like have in no way crowded out local counterparts like Nirula’s,Bikanerwala,Haldiram,Sagar,Nathus,etc. Rather,if at all,the latter have emerged stronger by adopting modern technology and management. The same would apply to modern,Indian-managed retail trade. In fact,many of the organised Indian retail sector players have been requesting the opening of the sector up to FDI because of the advantages it offers.

c) FDI in retail trade will at best penetrate into metros and other cities having a population of one million or above. it is unlikely to reach smaller cities,towns,or rural areas as volumes cannot sustain that nature of business. Therefore,the share of organised sector in retail sales is unlikely to go beyond 10 per cent (from the present level of 2 per cent).

d) Domestically produced goods would continue to dominate retail sales even after the entry of foreign players,as MNC brands of foreign origin,which are generally much more expensive compared to their locally produced equivalents,would have limited demand.

e) Unorganised retail trade sector will also benefit from lower prices of goods,as they will be able to access large cash and carry outlets,which are very much part of organised retail business.

f) The entry of foreign brand names will also lead to quicker development of the Indian SSI sector,as many foreign companies entering the retail trade sector would like to source their requirements from local firms,including small-scale units due to the price advantage.

In view of the above,the following proposal is submitted for the consideration of the Group of Ministers on FDI:

To recommend to the Cabinet to permit FDI up to 100 per cent in retail trade subject to the following conditions:

I. Government approval on a case-by-case basis

II. Payment of royalty will not be permitted,as there is no proprietary technology involved in retail trade activity.

III. Minimum capitalisation:

a) for wholly-owned subsidiary or 100 per cent FDI

i) US$ 10 million for a retail chain without any restriction of the number of outlets; and

ii) US$ 1 million for a single outlet entity

b) for a joint venture with FDI exceeding 75 per cent but less than 100 per cent:

i) US$ 5 million for a retail chain without any restriction on the number of outlets; and

ii) US$ 0.5 million for a single outlet entity

c) for a joint venture with FDI exceeding 50 per cent but not exceeding 75 per cent

i) US$ 2 million for a retail chain without any restriction on the number of outlets; and

ii) US$ 0.2 million for a single outlet entity

d) for a joint venture with FDI up to 50 per cent

i) US$ 1 million for a retail chain without any restriction on the number of outlets; and

ii) US$ 0.1 million for a single outlet entity

In all the above cases,50 per cent of the minimum capitalisation prescribed would have to be brought upfront and balance within two years of commencement of business. The minimum capitalisation norm will open the sector toserious players only and will also ensure that FDI in this sector will bring in substantial investment and technology in order to create necessary forward and backward linkages.

IV. Any other condition/s as prescribed by the Group of Ministers

The submission of this note has

the approval of Commerce & Industry Minister.

(M.S. Srinivasan)

Joint Secretary to the Government of India