The recent wave of reforms by the Government to incentivise foreign direct investment (FDI) in various sectors is bringing a new zeal to the investment options in India. One of the most debated reforms is the policy for allowing 51 per cent FDI in multi brand retail.
Retail Market in India
The Indian retail industry has experienced growth of 10.6 per cent between 2010 and 2012 and is expected to increase to US$ 750-850 billion by 2015. Food and Grocery is the largest category within the retail sector with 60 per cent share followed by Apparel and Mobile segment.
Within the organised retail sector, Apparel is the largest segment. “Food and Grocery” and “Mobile and telecom” are the other major contributors to this segment.
Evolution of the FDI policy in multi brand retail
The Government of India had been considering opening up the multi brand retail sector to FDI for some time. They had released a discussion paper in 2010 on the topic and had extensively gathered public, academic and industry views on the issue. In November 2011, the Government came out with its proposal for the new FDI policy. However, unable to achieve political consensus on the issue, they had to shelve their plans for the enactment of the policy. Finally, the Government decided to pass the new FDI policy on multi brand retail in September 2012 to increase investment options in India.
The FEMA notification issued by the Reserve Bank of India permitting FDI in the retail sector was laid before the Houses of Parliament and the same has been cleared without any modification.
The changes in some of the policy conditions indicates government intention to attract more NRIs to invest in retail sector of India and provide a window to foreign retailers to cultivate/ grow the SME segment.
The FDI policy conditions will have a different impact on the various sub-segments of the retail industry in India. A policy condition might have a low impact in one segment but could be a major stumbling block for another segment. Implications of each FDI policy condition in Mass Grocery, Apparel and specialty stores such as Beauty & Wellness and Consumer Electronics are:
* Minimum FDI of US$ 100 million: Minimum FDI of USD 100 million and a constraint of maximum 51 per cent stake of the foreign entity imply that the minimum investment required by both, the foreign and the Indian partner together, is more than Rs 1000 crore
* 50 per cent of FDI in backend infrastructure in three years: Minimum investment of Rs 220 crore-Rs 250 crore is to be invested in backend infrastructure in the first three years to invest in retail sector of India. However, different retail segments have dynamic requirements of backend infrastructure
* 30 per cent of sourcing from “small” industries: This policy constraint implies that retailers should have at least 30 per cent sales from private label brands or unbranded products sourced from small industries
Policy conditions of 50 per cent investment in backend and 30 per cent sourcing from small industries are the two most difficult conditions to be met for FDI in multi brand specialty retail such as Consumer Electronics, Beauty & Wellness etc.