Global perceptions about India and its economic might and potential have changed dramatically over the last few years. And no sector better exemplifies this than retail. The organised retail sector had only a very miniscule 3% share of the overall domestic retail market in 2004.
After growing at over 36% in the last couple of years, the sector is believed to have burgeoned to around 4.7% of the $230-billion retail market in 2006.
This stupendous growth has triggered a retail revolution in the country, which has made way for modern and indigenously developed retail formats. However, to sustain this overwhelming flurry of activity, the Indian retail sector needs significant capital; investments required in the sector in the next five years are around $25 billion, compared to $2 billion that trickled in over the last decade. Also, the retail sector requires access to global technology, improvement in the supply-chain, and application of global best practices, which may not always be available locally, thus posing a strong case for opening up foreign direct investment in this important sector.
Traditionally, retail has been regulated. For many years, it was as good as closed to foreign players and it was only in 2006 that the sector was partially opened up to foreign players.
Now, foreign investment in the wholesale cash-and-carry segment is permitted up to 100% under the automatic route. In the case of single-brand retail, FDI is now permitted to the extent of 51% with prior government approval.
However, FDI continues to be completely prohibited in multi-brand retail, requiring some foreign multinationals to follow the franchise route or the wholesale cash-and-carry route to tap the full market potential.
Breaking the code of the terms ?single-brand retail?, ?multi-brand retail?, ?wholesale cash-and-carry? and ?franchise? has not always been easy for foreign retailers. In case of single-brand retailing, there are further conditions (products should be sold under the same brand internationally as well). Also, single-brand retailing covers only those products that are branded during manufacture. Questions could also arise as to whether sub-brands of master brands fall under the single-brand retail criteria. Also, one has be careful as to what is exactly covered under the open wholesale cash-and-carry segment and what falls under the closed retail segment.
The road map for opening up the retail sector is far from clear. Some time ago, the government had sent positive signals with the relaxation of FDI norms for speciality retail such as sports goods, consumer electronics, building equipment and stationery.
Certain news reports also suggest that the government has prepared a new strategy paper which proposes two alternative options: a hike in FDI for single-brand retail to 100%, or to permit 49% FDI in multi-brand retail.
However, conflicting reports about plugging the franchise route for foreign retailers sends out completely different signals altogether.
Such a restricted, fragmented and ambiguous FDI policy regime may become an impediment to the rapid growth of the retail sector. This is especially so when other emerging markets such as China, Russia and Brazil have effectively opened up their retail markets to global retailers without much hesitation.
India still needs access to capital, technology, improvement in supply-chain and international best practices. A larger presence of global retailers is also likely to result in greater sourcing of goods from India which will give a new momentum to growth.
Of course, concerns about safeguarding the interests of small retailers and farmers will have to be addressed. But that is true irrespective of whether FDI is allowed in the sector or not.
What is really required is a clear idea of the government?s thinking, intent, and policy about opening up the sector, whether such opening up is gradual or in phases. China allowed 26% FDI in retail in 1992 and then raised the cap after a few years to 49%. In 2004, it permitted 100% FDI in retail.
A clear indication of the proposed policy is essential, particularly in view of the fact that the domestic retail story has aroused keen interest among foreign as well as large Indian retailers alike. India would be able to attract significant capital and technology in the retail sector only when all the different stakeholders can see a clear road map of what awaits them in the future.
Thus, given, the huge unleashed potential of the Indian retail sector, the need of the hour is a simple and unambiguous policy on FDI in the sector to enable foreign multinational retailers to plan their operations.
?The writers are from Ernst & Young?s retail & consumer products practice
