Retail-FDI lost in policy maze

Written by Uttam Gupta | Updated: Oct 18 2013, 09:34am hrs
More than a year after the government approved FDI in multi-brand retail with 51% foreign ownership, India has not received even a dollars worth of investment.

Now, retail-giant Walmart, which had a 50:50 JV with Bharti for wholesale cash-and-carry depots and was contemplating a retail partnership with the latter, has exited the JV and put the other plan on hold, the sole reason being regulatory hurdles.

Why is our regulatory environment not conducive Why, even after protracted efforts to streamline rules, does the regulatory maze refuse to go away

Let us reflect a bit on the Indian retail scenarioits challenges and opportunities, and, most importantly, its need for foreign investment. The Indian retail market is worth around $500 billion. The retail-scape is largely of mom-and-pop or kirana stores with organised retail occupying barely 5% of it. The

kirana stores source most of their stock from SMEs while some goods come from corporate entities. The supply- and distribution-chain for most of the goods that these stores sell are riddled with rigidities and constraints, creating inefficiencies which lead to high costs and compromise quality, thus eroding consumer satisfaction.

The lack of proper storage and transport arrangements leads to substantial losses of perishables. Post-harvest loss from vegetables and fruits alone is around R50,000 crore. Often, therefore, the quality of foodstuff reaching the table becomes a casualty. There are intermediaries aplenty between the producers of the goods and the consumers. Thus, the cascading effects of margins and taxes/duties along the supply-chain leads to high costs for the consumer. The retailers, too, are at the receiving endwithout any real power to push for much needed improvement in logistics. The presence of Indian corporate big-wigs in the retail spacefor almost a decade nowhas failed to make any dent.

FDI-in-retail was conceived as a game changerthe government believed that MNCs could fill the void in infrastructure, bring in modern technology and practices, all the while developing a direct interface with farmers/producers. To this end, the government ought to have allowed 100% FDI in retail without any encumbrances. Instead, it has capped foreign equity at 51% and announced a host of conditions, which was a maze and remains one even after a lot of tweaking. Naturally, foreign investors feel very uncomfortable in putting their money in this market!

Why has the retail-FDI policy gone down this path Did the government perceive any threat from 100% foreign-owned retail Assuming for a moment that such concerns are real, then why should the government offer up 51% to the foreign entities, giving them majority control

By capping equity at 51%, the government is only delaying investment as foreign investors spend time looking for an Indian partner, carving out deals and getting requisite approvals.

But two conditions affect MNCs interest the most: the minimum $100 million investment rule, 50% of which is for creating back-end infrastructure, viz. storage, food processing, quality assurance, etc, and the rule on sourcing 30% of the stock from SMEs.

How will the 50% limit be benchmarked Will it be applicable to the first tranche or to all tranches till the entire spending is completed Will acquisition of an existing Indian retail be covered Or, will greenfield investments only qualify

What should be the size of an entity to qualify for SME classification Will it continue to enjoy this status even after it crosses the current $2 million cap Which categories of supplies will be covered (or not be covered) under the 30% sourcing rule

These prescriptions tantamount to micromanaging the investor and its investment. Even if these are resolved, investors will still have to face the bigger imponderable of states approval!

The government already permits 100% FDI in wholesale cash-and-carry business without any ownership- or sourcing-restrictions. These outlets sell to shopkeepers, restaurants and other institutional customers. FDI in retail is a logical extension of this. FDI in single brand retail was already permitted with a cap of 51%. Last year, this was increased to 100% and sourcing restriction effectively removed by making 30% requirement discretionary. We have seen results with IKEA bringing in over $2 billion.

When the benefits are known, and the policy tested (given the sales to institutional buyers in the case of FDI in wholesale), the government should extend the single-brand retail FDI policy to multi-brand retail as well.

The author is a policy analyst