Mumbai: India’s commerce and industry ministry is considering to propose 100% foreign direct

investment in multi-brand retail but with stiff sourcing requirements, the Economic Times
reported on Tuesday.

“We are preparing the paper that will be placed for public debate in some time,” the newspaper
quoted an unidentified senior official in the Department of Industrial Policy and Promotion as
saying.

At present India does not allow foreign investment in multi-brand retail, while up to 51% is
allowed in single brand retail.

The discussion paper is expected to make it mandatory for multi-brand retailers to sell products
at wholesale prices to small shopkeepers, giving them the benefit of scale on sourcing, the
newspaper said.

Companies will also have to procure products domestically and help improve returns for farmers,
it said.

A final decision on the proposal will be taken after deliberations with the consumer affairs
ministry, the paper said.

Retailing is the largest private sector industry in the world economy with the global industry size
exceeding $6.6 trillion and a latest survey has projected India as the top destination for retail
investors. And the further upsurge is anticipated in the retail sector as the Government of opened
up 51% FDI in single brand retail outlets. And as the government is in a process to initiate a
second phase of reforms, it is cautiously exploring the avenues for multi-brand segment. The
Government is seeking for these options keeping in view the existing social framework of India
and the will ensure that the entry of global retail giants do not displace the existing employment
in the retail business.

Industry experts are sensitive to the point that local markets have an edge over the retail investors
in India as they have unique advantages such as an understanding of local needs and extended
service like home delivery. As the FDI influence on the Indian retail sector sets in, the total size
of the retail trade is expected to grow extensively in the coming years and the consumer
segments patronizing the big malls will create frenzy for organized retailing predicting a growth
of 25-30 per cent per annum over the next decade. Moreover, Indian retail chains would get
integrated with global supply chains since FDI will bring in technology, quality standards and
marketing thereby, leading to new economic opportunities and creating more employment
generation.

Industry trends for retail sector indicate that organized retailing has major impact in controlling
inflation because large organized retailers are able to buy directly from producers at most
competitive prices. World Bank attributes the opening of the retail sector to FDI to be beneficial
for India in terms of price and availability of products as it would give a boost to food products,
textiles and garments, leather products, etc., to benefit from large-scale procurement by
international chains; in turn, creating jobs opportunities at various levels.
As foreign investors exploring their potentials in the retail sector, are keen on developing malls
in India, the size of organized retailing is expected to touch $30 billion by 2010 or approximately
10 per cent of the total. This has initiated market-entry announcement from some retailers and
has signaled to international retailers about India’s seriousness in promoting the sector. While
there are reports of international retailers like Wal-Mart analyzing business opportunities in
India; Reliance, the largest Indian conglomerate is investing $3.4 billion to become India’s
largest contemporary retailer. There are also reports of investments for ‘Hypercity Retail’ by
K.Raheja Group to establish 55 hypermarkets by 2015. All these factors will contribute in taking
Indian retail business to unexpected growth based on the consumer preference for shopping in
congenial environs and also availability of quality real estate.

otal retail sales in India will grow from US$ 395.96 billion in 2011 to US$ 785.12 billion by
2015, according to the Business Monitor International (BMI) India Retail Report for the second-
quarter of 2011. Strong underlying economic growth, population expansion, the increasing
wealth of individuals and the rapid construction of organised retail infrastructure are key factors
behind the forecast growth. With the expanding middle and upper class consumer base, there will
also be opportunities in India's tier II and III cities.

Mass grocery retail (MGR) sales in India are expected to undergo tremendous growth over the
forecast period. BMI predicts that sales through MGR outlets will increase by 218 per cent to
reach US$ 27.67 billion by 2015.

BMI forecasts consumer electronic sales at US$ 29.14 billion in 2011, with over-the-counter
(OTC) pharmaceutical sales at US$ 2.30 billion. The former sub-sector is expected to show
growth of 66.8 per cent between 2011 and 2015, reaching US$ 48.61 billion, with projected
double-digit growth of key products such as notebooks, mobile handsets and TVs. OTC
pharmaceuticals, meanwhile, should increase more, by 106.9 per cent throughout the forecast
period, to reach US$ 4.75 billion.

China and India are predicted to account for more than 91 per cent of regional retail sales in
2011, and by 2015 their share of the regional market is expected to be at least 93 per cent. BMI
forecasted growth in regional retail sales at 75.2 per cent for 2011, an annual average of 14.9 per
cent.

Organised retail in India is expected to increase from 5 per cent of the total market in 2008 to 14-
18 per cent and reach US$ 450 billion by 2015, according to a McKinsey & Company
report titled 'The Great Indian Bazaar: Organised Retail Comes of Age in India'.

Furthermore, according to a report titled 'India Organised Retail Market 2010', published by
Knight Frank India, during 2010-12 around 55 million square feet (sq ft) of retail space will be
ready in Mumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai, Hyderabad and
Pune. Besides, between 2010 and 2012, the organised retail real estate stock will grow from the
existing 41 million sq ft to 95 million sq ft.
Driven by the growth of organised retail coupled with changing consumer habits, food retail
sector in India is set to be more than double to US$ 150 billion by 2025, according to a report by
KPMG.

According to the report ‘Strong and Steady 2011’ released by global consultancy and research
firm PricewaterhouseCoopers (PwC), India's retail sector, which is currently estimated at about
US$ 500 billion, is expected to grow to about US$ 900 billion by 2014.

India has also been ranked as the third most attractive nation for retail investment among 30
emerging markets by the US-based global management consulting firm, A T Kearney in its 9th
annual Global Retail Development Index (GRDI) 2010. Within Asia, India is expected to
account for the third largest share at US$ 2.7 billion in 2015, according to a report released by
research firm Ovum on January 12, 2011.

Foreign direct investment (FDI) inflows between April 2000 and January 2011, in single-brand
retail trading, stood at US$ 128.34 million, according to the Department of Industrial Policy and
Promotion (DIPP).

 Carrefour, the world’s second-largest retailer, has opened its first cash-and-carry store in
India in New Delhi. Germany-based wholesale company Metro Cash & Carry
(MCC) opened its second wholesale centre at Uppal in Hyderabad, taking to its number
to six in the country.
 Jewellery retail store chain Tanishq plans to open 15 new retail stores in various parts of
the country in the 2011-12 fiscal.
 V Mart Retail Ltd, a medium-sized hypermarket format retail chain, is set to open 40
outlets over the next three years, starting with 13 stores in 2011, in Tier-II and Tier-III
cities.
 RPG-owned Spencer's Retail plans to set up 15-20 new stores in the country in 2011-12.
 Spar Hypermarkets, the global food retailing chain of the Dubai-based Landmark Group,
expects to start funding its India expansion beyond 2013 out of its local cash flow in the
country. So far, the Landmark Group has invested US$ 51.31 million in setting up five
hypermarkets and plans to pump in another US$ 51.31 million into the next phase of
expansion.
 Bharti Retail, owner of Easy Day store—supermarkets and hypermarts—plans to invest
about US$ 2.5 billion over the next five years to add about 10 million sq ft of retail space
in the country by then, according to a company spokesperson.
 The country's largest consumer products company Hindustan Unilever is testing waters in
the coffee shop market even as US giants Starbucks and Dunkin' Donuts finalise plans to
tap into increasing out-of-home consumption of coffee in the country. Hindustan
Unilever has opened a 'Bru World Cafe' outlet on a pilot basis at Juhu, an upmarket
western suburb of Mumbai.

 Policy Initiatives

 100 per cent FDI is permitted under the automatic route for trading companies for cash
& carry trading wholesale trading/ wholesale trading.
 FDI up to 51 per cent under the Government route is allowed in retail trade of Single
Brand products, according to the Consolidated FDI Policy document. Permitting FDI in
multi brand retail is being contemplated by the government under union budget 2011-12.
“FDI in multi-brand retail should be opened up as this is a capital intensive sector and the
entry of foreign players will lead to greater competition in this critical sector,” said Mr
Hari S Bhartia, President, CII and Co-Chairman & Managing Director of Jubilant
Bhartiya Group, in the 2011 pre-budget meeting with Mr Pranab Mukherjee, the Finance
Minister.

 The Consumer Affairs Ministry has given the green signal to allow 49 per cent FDI in
multi-brand retail. It has written a letter to this effect to the Commerce Ministry. "Multi-
brand retail should be permitted with a cap of 49 per cent. A significant chunk of
investments should be spent on back-end infrastructure, besides logistics and agro-
processing," the Consumer Affairs Ministry had said in response to the discussion paper
floated by the Department of Industrial Policy and Promotion (DIPP) in June 2010 on
allowing 100 per cent FDI in multi-brand retail.

 The Securities and Exchange Board of India (SEBI) has notified the increase in the retail
investment limit to US$ 4,423 in initial public offers (IPOs). The new norms will be
applicable to issues that have yet not opened for subscription.

 Road Ahead

 According to industry experts, the next phase of growth is expected to come from rural
markets.

 The organised modern retail segment in India will grow by over three times during the
next five years (from 2010), to reach a figure of US$ 80 billion, as per consultancy firm,
Technopak. India's modern consumption level will double within five years to an annual
figure of US$ 1.5 trillion from the present level (taking 2010 as the reference year) of
US$ 750 billion, according to Raghav Gupta, President, Technopak.

 Further, the luxury brand in the country is estimated to be worth about US$ 4.06 billion-
US$ 4.51 billion and is expanding rapidly driven by the growing aspirations of youth and
income levels in the country. Thus, major international brands are in the process of
expanding their retail presence. For instance, Paul & Shark now has two stores with
Hyderabad and will have few more by next year, Zegna, another Italian brand, known for
its formal wear and quality suits, is also expanding and Diesel will have seven stores in
the country.

 Ramesh Tainwala, who brought global luggage maker Samsonite into the country, has
bought a 50 per cent stake in Planet Retail, which markets fashion brands like Guess,
Next and Nautica from NRI businessman VP Sharma, in a bid to expand his presence in
the booming retail space.
 In addition, the direct selling fast moving consumer goods (FMCG) segment is growing
faster in Uttar Pradesh compared to markets in other states. Segment leader Amway India
said it was growing by 35 per cent in Uttar Pradesh vis-à-vis 27 per cent pan-India.

 Pricing is key

 Differences between urban and rural consumers are significant in both China and
India. Most foreign entrants wrongly assume that anything Western will sell. The
initial fascination for Western brands goes off once the discerning consumer finds
local products of the same quality at affordable prices. Getting the price right is
essential. Initial trials, despite high prices are a common phenomenon. However, the
average consumer is extremely value conscious and seldom accepts dollar-
denominated prices, which are often the benchmarks set by global entrants.

 For instance, a well-known Scandinavian furniture retailer in China priced a table at

 Markets within a market

 India, with its distinctive regions, diverse religions, languages and cultures, is as
diverse as many sub-markets within a market like China. Retail formats that have
worked in South India have not received the same response in the other regions. It
has been no different in China. In China, the consumer market is growing fastest in
cities with population ranging from half to three million. Companies that focus on the
large, high profile coastal cities seem to be missing out, just as those in India that
are focusing on the principal urban centers. Foreign retailers entering India and
China are faced with not single but multiple cultures, resulting in a never-before-kind
of cultural stretch.

 Size, population and middle income people:

 "In terms of sheer size, India and China have huge potential in the retail sector,"
says N V Sivakumar, executive director of PricewaterhouseCoopers (PwC), India. Like
China, India also has the population, which crosses Rs.100 crores and more
important is that most of the people belong to middle income group. So as far as
they are concerned they are highly price and value concisions consumers. So the
foreign players must consider the above two factors i.e. price and value of products
they offer.

 India's advantage over China:

 The advantage that India possess when compared to China are as follows:     

 Indian market least saturated:

 This is one of biggest advantage that India possesses over China. AT Kearney's
recently released second Global Retail Development Index (GRDI), India has moved
up one rank to No. 5 in terms of attractiveness to global players. China's rank has
dropped from one to three. India has gained because there are no global players in
India but in China there are already 14 players. So in China the scope for further
development is less when compared to India. As India has no foreign players it
makes market least saturated and provides enough opportunities for further
development.

 Existence of counterfeits:

 Though Indian market also contains a good number of counterfeits it is not at par
with China. Chinese market leads in the production and availability of counterfeits.
As the counterfeits are more in China when compared to China it makes Indian
market safer. Comparatively this makes Indian market more trustable. This would
act as an added advantage to India. 

 "FDI WILL BE AN ADVANTAGE AND NOT A DISADVANTAGE":

 When FDI is allowed in India then it will be an advantage to India and not a
disadvantage to India.

 FDI will not affect unorganized players:

 At present, mom-and-pop stores cater to 97% of the total market. They have unique
advantages, like indigenous processes, skills in retaining customers, proximity,
convenience and services. However, global retailers investing in new markets have
not hampered local retailers. The kirana shops in large parts of the country will enjoy
built-in protection from supermarkets because the latter can only exist in large cities.
The Kirana shops can get goods from the large outlets (which are present in large
towns and cities only) and sell it to their customers so that their profit margin would
increase.

 For instance, FDI in telecom did hit urban STD booth operators, but most of them
have now been converted to kiosks selling mobile connections and SIM cards.

 Lowering of prices – not a disadvantage:

 Lowering of prices will not be a disadvantage, because if foreign players are present
in India it makes the availability of goods at cheaper prices. This arises because the
foreign players will have good technology, supply chain etc. that makes the product
price cheaper. So this can be availed by the Kirana shops (i.e. buying the goods from
the large retailers and selling it to their customers). Moreover, as the price decreases
the purchasing power of the people will also increase. So the issue of lowering prices
will not be a disadvantage, it will always be an advantage.

 FDI's benefit from the view if the customers:

(i) FDI will provide access to larger financial resources for investment in the retail
sector and that can lead to several of the other advantages that follow
(ii) ii) The larger supermarkets, which tend to become regional and national chains,
can negotiate prices more aggressively with manufacturers of consumer goods and
pass on the benefit to consumers

(iii) They can lay down better and tighter quality standards and ensure that
manufacturers adhere to them.

(iv) The supermarkets offer a wide range of products and services, so the consumer
can enjoy single-point shopping   

 FDI – at last:

 Finally the government of India has said that FDI would be allowed in India. Thanks
to the impact of WTO, which played an important role.  The government has said
that "51 percent FDI would be allowed" and also under the system of "Single brand
retailing".

 What is single brand retailing?

 When the government announced about single brand retailing there is a lot confusion
regarding that. Finally the Department of Industrial Policy and Promotion (DIPP)
have come out with the notification. These stipulations would prevent third party
sourcing and encourage multinationals to set up a manufacturing base in
India.          

 Further, the notification makes it clear that FDI would be allowed only with a prior
three-tier approval of the Government. The applications for approval will have to
specifically indicate the product/product categories that are proposed to be sold
under the single brand, with additional products or product categories requiring fresh
approval.

 Conditions under single brand retailing:

 They are as follows,

 1. Products to be sold should be of a `single brand'.

 Examples were of Sony and Nokia

 Recommendations for India

 The recommendations for India are,

* Permit FDI in phases (first allow for 49 percent, after some years 74 percent,
based on the results 100 percent).
* Invest in supply chain infrastructure
* Grant industry status to retail business
* Ensure flexibility of labor laws.

 Conclusion

FDI in retailing would surely an advantage to India and it would also help India in
becoming 'developed country'. As the people also accept the retailing it will be an
advantage to them also. So the government should also open the retail sector to the
foreign investment, as it also serves as an employment generator.

So, 'FDI in retailing is the need of the hour'

 THE debate on foreign direct investment (FDI) in retail is hotting up. Once again, the
ruling Government and its allies are in sharp disagreement. What is the debate about?

 The opposition to FDI in retail rests on several planks. One, the entry of large global
retailers such as Wal-Mart would kill local shops and millions of jobs. Two, the global
retailers would collude and exercise monopolistic power to raise prices and
monopsonistic (big buying) power to reduce the prices received by the suppliers.

 Hence, both the consumers and the suppliers would lose, while the profit margins of such
retail chains would go up. Three, it would lead to lopsided growth in cities, causing
discontent and social tension elsewhere.

 Before evaluating these apprehensions, it should be recognised that even the Left is not
against all kinds of FDI in retail. It is in favour of selectively allowing FDI in food, dairy
and grocery segments of retail trade.

 In other areas such as readymade garments and various industrial consumer goods, it
would allow only big domestic retailers to compete with small local kiranas. Even when
FDI is to be allowed in retail food and grocery sectors, it would like to put a cap on
foreign ownership.

 In other words, foreigners — if they want to enter — will have to take local partners to
start with. Once the local partners and other local players learn by doing, the FDI cap can
be raised gradually. Foreigners can be allowed to set up 100 per cent foreign-owned retail
chains only after the local players are able to muster enough capital, experience and
expertise to compete with established global giants.

 It is interesting to note that the Left approach to the issue broadly follows the Chinese
model. China first allowed FDI in retail in 1992. The initial FDI cap was 26 per cent. It
took China 10 years to raise the limit to 49 per cent. The 100 per cent foreign-owned
retail stores were allowed only from 2004.

 Further, foreign chains were initially permitted to set up stores only in a few select cities.
Local retailers were officially encouraged to become big by mergers and acquisitions so
that they would be in a position to compete with big global players. In other words, China
provided infant industry protection to domestic retailers, which was gradually reduced as
the local players gathered strength.

 The supporters of FDI in retail see many advantages. The biggest benefit, according to
them, would flow from higher exports. They point to the Chinese experience.

 The global retailers taken together buy about $60 billion of goods each year from China
for exports. Contrast this with India where less than $1 billion of exports are accounted
for by global retailers (mostly metro dairy farm). Clearly, the scope of exports through
the global retailers is enormous, indeed.

 However, one may ask: Can not Wal-Mart or Carrefour source products from India, even
if they are not allowed to set up stores here? Though in principle that is possible, in
reality, things do not work out that way. A global chain would buy large quantities for
exports on a sustained basis only when it establishes a close linkage with the local market
and suppliers. This happens after they open local stores.

 By being continuously close to local suppliers and customers, they are in a better position
to control and monitor the entire supply chain including the designing of products, the
quality of inputs, the manufacturing process, the quality of output, the standardisation,
labelling and packaging, transportation, warehousing, the distribution network, changing
product mix quickly in response to changing global fashions and establishing the right
kind of captive suppliers who would not be selling to their competitors.

 The supply chain and the infrastructure, which they would develop for their local stores,
would yield significant cost economies when it is also used to procure supplies for their
global needs. That is why Wal-Mart sources some $18 billion of goods from China for
their global operations. But this happened only after it was allowed a substantial presence
in the Chinese local retail market.

 How about the potential job loss in local kiranas? True, small retail stores are an
important source of jobs, providing about 7 per cent of the total employment in India.
Moreover, they are providers of employment of the last resort. Anyone without a job can
set up a local retail outlet. However, India is not an integrated homogeneous market; it is
a hierarchy of markets catering to people of many different income levels and tastes. For
example, both Sony and Santosh can coexist, catering to market segments.

 Entry of sophisticated branded products affects the unbranded mass market only
marginally in a vast poor country such as India. Moreover, in malls where the large retail
chains set up their stores, typically, there will also be many small shops which will attract
people.

 Further, the street-corner shops will have some advantages over big stores located many
miles away in shopping plazas. In India, transportation and parking are big problems for
people who want to visit shopping malls.
 For them, it is more convenient and cost-effective to purchase many of their daily
requirements from the neighbourhood stores, especially as these establishments stock
goods that are in particular demand in the locality. Hence, the pop-and-mom street corner
shops can very well survive.

 The benefits from greater exports would be particularly high in the farm sector. Right
now, there is a tremendous amount of wastage and value loss of agricultural products due
to lack of storage, refrigeration, transportation and processing facilities. As a result,
farmers' price realisation remains low while the consumers in the cities end up paying a
high price. Given the fiscal problems of the government, it is too much to expect it to
build the required infrastructure.

 To the extent the large retailers establish a direct linkage with the farmers by cutting out
many layers of middlemen, develop the processing facilities and export the products to
meet their global requirements, farmers would get better prices and bigger markets while
the consumers would benefit in terms of lower prices, better quality and greater variety.
The resultant rural prosperity may open up markets for other industrial goods and help a
more balanced regional development as also job creation in other sectors.

 Similar gains would flow from higher exports when the global chains are allowed in other
sectors such as readymade garments. As for monopolistic pricing practices, the best
safeguard would be in permitting all global chains to set up shops. The competition
among them (as has happened in the automobile industry) would ensure better prices for
consumers and suppliers alike.

 Thus, the benefits from higher exports are likely to offset any direct job loss in the local
kiranas as result of competition from big global retailers. Anyway, if the domestic big
players are allowed to operate, the job loss problem for the small shops would remain,
while the benefits from larger exports would not be there. So, clearly, if big players are to
be permitted in retail, this must extend to FDI. Otherwise, the full range of benefits will
not be realised.

 Of course, some lead time can be provided to the local players to consolidate their
position before they face full-fledged competition from established global players. But,
then, temporary protection should be really temporary. The Government must make a
clear commitment to the time-frame over which protection from foreign competition
would be removed gradually.

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