FDI in retail likely within weeks


Staff member
New Delhi July 1:

After years of debate, foreign direct investment in retail may soon be a reality with a panel of secretaries expected to approve the framework for allowing global retail chains to set up shop in India later this month.

Government sources said the proposal has gained momentum, with both Prime Minister Manmohan Singh and finance minister Pranab Mukherjee backing it, and chances are that the Cabinet could clear the proposal in August, setting the stage for the entry of large chains by the end of the current financial year.

While a date for the meeting of secretaries would be fixed over the next few days, the outline of the policy has been finalized after two rounds of inter-ministerial consultations. The plan envisages allowing foreign chains such as Walmart and Tesco to hold up to 51% stake in the Indian venture. This is higher than what had been proposed during the first round of consultations.

But there could be areas demarcated for these retailers. For instance, it would be left to state governments to decide whether foreign chains are welcome or not. Similarly, the government intends to allow these chains to operate in large cities only. How large cities are defined remains to be seen. If the cut-off is fixed at one million population, then the retailers can open stores in around 50 cities. But if the bar is raised to 10 million, then only Delhi, Mumbai and Kolkata will make the cut.
The move is aimed at countering criticism that the large chains will result in the closure of mom-and-pop stores. Over the years, Opposition parties such as BJP have used livelihood concerns of kirana stores to block FDI in multi-brand retail. Though the government believes that a large footprint of multi-brand retail chains will boost employment, efforts are also underway to stipulate local sourcing requirements. For instance, the secretaries' panel will discuss a plan to mandate 25-30% sourcing from small and medium enterprises.

In a recent interaction with media, economic affairs secretary R Gopalan had said the government could contemplate putting in place rules stipulating majority sourcing from India. But the view in other ministries is that this might not be compatible with the rules prescribed by the World Trade Organisation. Further, to stay competitive, especially vis-a-vis kirana stores, the organized retailers will be forced to procure from local manufacturers and producers.

Only in case of goods such as electronics or high-technology items that are not manufactured in India or the local producers are not cost-competitive would a retailer opt to import. In any case, most international players are already in India and have been sourcing for their global requirements or have additionally got into the wholesale cash-and-carry segment where they are not permitted to sell to individuals. So, in a way, the supply chains have already been built, said a government official. The other requirement that foreign retailers are going to face is a mandated level of investment in back-end infrastructure to develop supply and distribution chains which would help check wastage.