Saturday, September 15, 2012

Reforms Season Two - Part I: FDI in Indian retail sector - Movers and Freezers

For reading rest of the articles in this series, please visit

After a long sleep and policy paralysis, Manmohan Singh government woke up to the realities - even though it was in the face of a possible degradation to junk status. Recent big bang actions from government, even risking the displeasure of allies, may be one of the best decisions by second Manmohan Singh government. The major decisions are,

I.               Permitting FDI in multi-brand product retail trading
II.             Permitting up to 49% investment for foreign airlines in Indian air transport services.
III.          FDI in power trading exchanges
IV.          Enhancing the FDI in companies operating in Indian Broadcasting sector from 49% to 74%
V.             Disinvestment of 9.33% of MMTC shares (through stoke exchanges)
VI.           Selling 10% of Oil India Limited (through stock exchanges)
VII.        Sale of 12.15% of NALCO  (through stock exchanges)
VIII.      Disinvestment of 9.59% of Hindustan Copper (through stock exchanges)
IX.           Amending the conditions for FDI in single brand retailing.

Let’s go through the policies one by one.

1. Permitting 51% FDI in multi-brand product retail trading

Long delayed, opening retail sector for FDI may be the most important decision in the block. Even though the policy is diluted, it can still kick start the aura of reform days. There are some changes in the policy introduced (and later withdrawn) in the last year,

a. Retail sales outlets may be set up in those States which have agreed or agree in future to allow FDI in MBRT under this policy.

b. outlets may be set up only in cities with a population of more than 10 lakh (States/UTs not having cities with population of more than 10 lakh, retail sales outlets may be set up in the cities of their choice, preferably the largest city) as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities

c. 50% of total FDI brought in shall be invested in 'backend infrastructure' within three years of the induction of FDI, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will NOT be counted for purposes of backend infrastructure.
d. at least 30% procurement from Indian small industries

Investment in backend infrastructure like cold storage, warehouses etc, will enable Indian farmer to reduce his/her post-harvest loss - currently calculated around 30-40%. It may not be as good and sweet as central government insists, but if implemented, will increase the bargain power of Indian farmers vis-a-vis wholesale and retail traders. Instead of retailers fixing the price and farmers swallowing it, there will be a competitive pricing system.

The customer is also stands to benefit, as the quality will increase and the expenditure may reduce.

At the same time measures like, 10 lakh population limit etc - the numbers may go down later - will draw a line for foreign companies to penetrate deep in to markets. 30% sourcing from local markets will also act as barrier for dumping low cost Chinese goods in Indian markets.

If 'Competition Commission of India (CCI)', which is currently doing a good job, is putting her one eye on unlawful, anti-competitive trade practices, then we are good to go ahead.

Support from States

Interestingly, contrary to the popular assumption of left leaning politicians that Indians are totally against FDI in retail, around eight states (Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and Manipur) and two union territories (Daman & Diu and Dadra and Nagar Haveli) expressed support for the policy in writing. Jammu & Kashmir may also support the policy.
However, West Bengal, Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha are in the opposite sides. This shows a virtual divide of Congress ruled states (except Kerala) supporting the measure, opposition ruled states opposing the measure.


Well, according to the policy, states who don’t want to implement can opt out. They can wait and watch how the game is going on other states losing their advantages/disadvantages in taking the first step. Broadly speaking, the excellent experiences of companies like Wal-Mart, Carrefour, Target, Kroger, Aldi Einkauf, Schwarz Unternehmens Treuhand KG, Tesco, Metro etc in terms of management, supply chain and ware-housing will be beneficial for India, of course under the watchful eye of Competition Commission of India (CCI).

As far as small retail stores/organized chains are concerned, this is to come today or tomorrow. In small cities, they can enjoy the protection for a longer time. However, in a globalized world, they can stand up and take competition in two ways – The LIC way (who withstood and succeeded in the battle against big names in insurance sector) or AirIndia way (which is not able to fight even against Indian private sector).



1. Government of India


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