A guide to FDI in retail
From farmer to consumer, the influx of foreign funds into multibrand retail will change the rules of the game for all players. A look at how the scenario will change. HT guidebusiness Updated: Nov 30, 2011 12:20 IST
So, what’s the fuss all about?
The government has decided to open up the retail sector to global investors through foreign direct investment (FDI) in multi-brand retail with a ceiling of 51%, and 100% FDI in single-brand retail.
What does it mean?
It means that global retailers such as Walmart, Carrefour, Tesco and others can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up 51% equity.
But Walmart, Carrefour and Metro already have stores in India, don’t they?
Yes, but these are wholesale cash-and-carry stores where only institutions or kirana shops can buy — not consumers.
What about single-brand retail?
Single brand retail companies such as Swedish furnishing giant Ikea or sporting goods and equipment major Reebok can set up stores of their own in India through their own subsidiaries. Till now they were required to set up stores through joint ventures in India that allowed the foreign partner to own up to 51% equity.
Has the government set any conditions for allowing FDI in retail?
It has come with a string of conditions. At least half of the FDI should be made in back-end infrastructure such as cold-chain and warehousing, the minimum FDI in any multi-brand retail project should be $100 million (around Rs 500 crore), state governments can prohibit FDI in retail in their states if they wish to, stores can be set up only in cities with a population of at least 1 million, and at least 30% of the value of manufactured items procured should be sourced from Indian small and medium enterprises.
Why is there so much of opposition about the decision?
Opposition parties and small traders are worried that large deep-discount stores of transnational corporations will drive street vendors and neighbourhood mom-and-pop kirana stores out of business endangering their livelihood.
Will kirana stores’ business be affected?
Unlikely because large deep discount stores cannot offer the convenience and loyalty of neighbourhood kirana stores who are available at the customers’ beck and call, literally.
How will the farmers’ benefit from organised retail?
FDI in retail will ensure procurement, at least of fruits and vegetables directly from farmers offering them higher income. At present, the price that a farmer gets for a kilo of onions is about half of what it is sold to by vendors and retailers to final consumers.
What about small and medium enterprises?
By engaging local producers, organised retail provides them with an access to a much broader consumer set. For instance, a leading retailer operating in north India has engaged a local pickle manufacturer in Amritsar and invested to upgrade its equipment.
What about consumers?Organised retail provides higher quality of goods on account of the pre–defined and stringent standards adopted by the retailers. And of course the price will be cheaper. Studies have shown that consumers, on an average, will save at least 10% on daily use goods.