India's top brick-and-mortar retailers have demanded a level playing field vis-à-vis online retailers. That's because e-retailers, with the easy access to foreign capital that allows them to offer deep discounts, have snatched business away from them. The offline retailers have a strong case: there is no reason why there should be different policy norms for online and offline retail. As it is, the odds are stacked against offline retailers because of high real estate prices, why make it worse with differentiated access to capital? While India does not allow foreign investment in e-retail, there are no restrictions on online marketplaces. Most e-commerce companies have, therefore, rejigged their structure to become marketplaces. This is as good as opening up the sector fully - except it raises compliance costs and, thus, reduces gains to consumers.
In offline trade, meanwhile, the policy is really complex. While 100 per cent foreign ownership is allowed in cash and carry (wholesale), the rules are different for single-brand retail and multi-brand retail: 100 per cent foreign investment is allowed in the former, while there is a cap of 51 per cent in the latter. There are other restrictions as well on multi-brand retail: 30 per cent of the stock must be sourced from local vendors and there has to be an upfront investment commitment of $100 million. More important, it is left for each state to decide whether it wants foreign-owned retail stores or not. Most states have welcomed foreign-owned cash-and-carry stores, because of the supply-chain efficiencies they bring in, but are reluctant to open up multi-brand retail because that could upset small retailers. Thus, global retailers have remained cold to India. Britain's Tesco is the only overseas retailer to have entered India - it has done so in collaboration with the Tata Sons-owned Trent Hypermarket. As a result, offline retail has got starved of funds, while their online counterparts are awash with money that they have used for customer acquisition effectively.
What is required at the moment is a uniform liberal policy for foreign investment in retail: offline as well as online. Instead of being stuck on the need to protect the small trader, which has deprived the country of substantial investments and employment opportunities, the Narendra Modi government would do well to liberalise the sector fully. Even for online retailers, negotiating the maze of rules is far from easy. Almost all of them spend a lot of time ensuring that they remain marketplaces, which in essence means they just provide a trading platform. This is unproductive work and also breeds inefficiencies. Given that the government talks frequently about improving the country's business environment, this is a glaring anomaly. If it is really serious about making India an attractive investment destination, retail could be a good starting point.
