The government is weighing a proposal to relax foreign direct investment (FDI) guidelines in food retail to allow a certain percentage of locally-produced non-food items along with the edible products. Although a final decision is yet to be taken by the government, it could allow a FDI-backed retailer to sell locally-produced non-food items worth around 20-25% of its investments at the farm-gate level, said a source. However, some feel the government should keep the rule simple and allow the sale of non-food items at a fixed percentage of overall FDI, instead of the investments at the farm-gate level. Monitoring compliance with the rule would be easy in this case, they argue. It’s not clear what the government would finally decide, as consultations are still on.
The liberalisation of the FDI regime is in sync with the government’s announcement in the Budget for 2017-18. Last month, Prime Minister Narendra Modi chaired a meeting on FDI.
In some markets abroad, retailers invest around 20% of FDI in setting up infrastructure at the farm-gate level. Going by this rough estimate, if the government endorses the proposal to allow sales of non-food items up to 25% of their investment at the farm-gate level, foreign retailers would be able to sell such items worth 5% of the total FDI, along with the food items. Such a step would hardly impact domestic kirana stores but would ensure steady investments at the critical farm-gate level. The non-food items could be related products like personal care or kitchenware etc that consumers would usually like to pick up along with food items in a supermarket.
Several global retailers such as Walmart, Tesco, Metro Cash and Carry and Auchan Group have conveyed to the government their willingness to set up shop here provided the rules were relaxed to add more items to the shelves. Even a Brazilian retailer is believed to be exploring opportunities to invest in India with a local partner. Although these retailers haven’t submitted details of investments they may make in India, the food processing ministry believes potential investments could be as high as $5-10 billion if rules are suitably relaxed.
The retailers argue that they have to change their entire business model for India if they are allowed only food items to sell, as they don’t have a “food-only model” anywhere, said the source. Also, with only food items on the shelves, it’s difficult to sustain operations, as margins are unimpressive and achieving profitability will be an uphill task.
Also, the government could soon allow up to 100% FDI in single-brand retail under the automatic route, said another source. However, there is no clarity yet on further liberalisation of FDI rules in multi-brand retail, as officials are tight-lipped on the issue.
Currently, while up to 100% FDI is allowed in single-brand retail, investment beyond 49% needs the government approval. In multi-brand retail, up to 51% FDI is allowed, via the government route. Recently, the government approved proposals of Amazon, Big Basket and Grofers, entailing total investments of $695 million, for retailing food items.
While this has marked a good start, analysts say the country’s retail landscape will undergo the desired changes when big retailers set up their own outlets here.
In June last year, the government notified that 100% FDI will be permitted (with government approval) in trading—including through e-commerce—of food products produced or manufactured in India to boost the realisations for farmers. The move was aimed at helping farmers, offering a much-needed leg-up to food processing in the country and creating massive employment opportunities.
Already, the food processing sector has started to see a jump in foreign investments. FDI inflows (in equity) in the sector touched $663.20 million in the April-January period, which were much higher than those of $506 million in the entire 2015-16 fiscal.
The decision to allow 100% FDI in marketing of locally-produced food items was important as food and farm items worth Rs 92,651 crore go waste annually in India due to a low level of processing and inadequate scientific storage.