CoS to take up note prepared by Commerce Ministry soon
A consensus has emerged in the government to permit foreign direct investment (FDI) in multi-brand retailing but with stiff riders.
The response from key departments of the government has formed the basis for the ministry of commerce and industry to prepare a note for the Committee of Secretaries (CoS), which is expected to meet soon and take a call on the issue. After the CoS clearance, a Cabinet note will be prepared for the approval of the Cabinet Committee on Economic Affairs (CCEA).
While all key ministries are on board, the ministry of finance has opined that its comments would be warranted just before placing the draft policy for consideration of CCEA.
Although the note favours FDI up to 51 per cent in multi-brand retailing, it gives states the power to allow FDI in front-end retail stores.
Although all key ministries have given their nods for opening up of multi-brand retail, various limits have been suggested. Ministries of agriculture and food processing and the Planning Commission have suggested FDI up to 100 per cent. The department of consumer affairs has suggested a cap of 49 per cent, while ministry of micro, small and medium enterprises has suggested a limit of 18 per cent. The department of information technology has suggested consultations with various electronic industry associations, who in turn have backed the proposal for a calibrated opening up of multi brand. The department of pharmaceuticals has advised that FDI in muti-brand retailing should be included in the study on the regulatory environment for FDI, being conducted by the ministry of commerce.
The inter-ministerial group of inflation headed by Kaushik Basu, who is the chief economic advisor in the finance ministry, has recommended that FDI in multi-brand retail should be permitted, as it could be one of the key steps to help reduce rising prices and cut the margin between farms and retail prices.
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The commerce ministry note says at least 50 per cent of the total FDI should be invested in backend infrastructure. However, the backend infrastructure can be made not necessarily by the same entity which is investing, but by an outsourced entity commissioned for this purpose. The minimum limit for FDIs to be brought is Rs 450 crore. Another rider is that cities with a population of 1 million (based on 2011 Census) can be locations for multi-brand retail stores. An area of 10 km around the municipality limits of such cities could also be included in the permission location.
However, outlets will be set up only in those states where the states agree to allow FDI in multi-brand retail. Thirty per cent of the sales turnover should be made directly or through wholesale cash-and-carry units set-up for this purpose. State governments can put conditions for integrating the small retailer or kirana merchants in the value chain. Also, 30 per cent of the value of the manufactured items procured (excluding food products) should be sourced from the SME sector. The respective state governments would put in place frameworks to monitor compliance with these conditions.
The department has also sought responses from across cross sections before preparing the note. For instance it points out that prominent organsised domestic retailers have generally supported FDI in multi brand retailing while small retailers have opposed it. The support says the observations by the department of domestic retailers could emanate from two reasons –they feel they are fully equipped to face competition or they expect FDi to bring them technology and innovation and they could look forward to joint ventures.
The move will help a bevy of foreign retail chains, including WalMart, Careffour and Tesco, which have been making a beeline for India. Under the existing rules, FDI is not allowed in retail, except for trade of “single brand” products; where up to 51 per cent foreign investment is permitted. FDI up to 100 per cent is also allowed in wholesale cash-and-carry trade. Many companies like WalMart have already come through this route by setting up a whole sale cash and carry business in a joint venture with the Bharti group.
However, the policy constraints have ensured that FDI in retail has been limited. Since 2006, when FDI was partially allowed in retail, the government has received an inflow of over Rs 850 crore. With 15 million outlets, India’s retail sector is highly fragmented. Only 4 per cent of the outlets are bigger than 500 square feet in area and the remaining 96 per are in the unorganized sector.
There have of course been fears that with a liberal FDI regime, the big global retailers would go in for predatory pricing, virtually destroying the small retailers. That is the reason why the government has treaded cautiously in this sector. Those opposing further liberalisation have contended that such a move would kill the country’s kirana shops, as well as give foreign retailers an unfair advantage, as the domestic retailers are still in a nascent stage of development and need protection.
There have also been fears that given the retail sector is the second-largest employer in the country, many could lose their jobs. Those who support further liberalisation say investment in this sector has been limited, especially in areas like logistics and cold-chain development, which are key to the growth of agriculture.