Finally, India gives approval to FDI in multi-brand retail

Keeping all resistance from opposition and political parties at bay, the Union cabinet of India has finally approved 51 per cent foreign direct investment (FDI) in multi-brand retail and allowed 100 per cent in single brand retail. This means, Indian consumers

can now shop from mega-discount chains run by a global retailer like Tesco, Wal-Mart or Carrefour. And 100 per cent FDI in single brand retail will encourage companies such as Sweden's homeware firm Ikea and clothing retailers like Gap and H&M to set up shop in India. Of course, the FDI clearance comes with several caveats to address fears of small traders that giant global chains will drive them out of business and throw millions out of jobs.

But what does this approval really mean to different sections of the industry? Is it a gain at someone’s loss? There has been a strong resistance to FDI clearance because of the fear that the entry of global retail giants would force the small traders to shut shop throwing millions of people out of jobs. While on the other hand, there has been a positive atmosphere since the time the government signalled at a clearance to FDI in mutli-brand retail, because it would benefit organised retail. No wonder Raj Jain, Wal-Mart India Managing Director and CEO says "This is a bold and significant move. It will redefine India's supply chain infrastructure and bring down prices." While Kishore Biyani, Founder and group CEO of Future Group that runs Big Bazaar, Pantaloons and other stores feels the consumer will gain from lower prices.

In fact, retail giants are happy with the decision since they feel that this move will not only redefine India's supply chain infrastructure but also bring down prices and as the new entrants begin sourcing products locally at higher prices. Small entrepreneurs will benefit as 30 per cent of all products will have to be sourced from them. It is estimated that with the entry of foreign players, farmers across India's six lakh villages would gain greater market access, higher profits, better technology and direct linkage with consumers. Large retailers would also be at benefit since they can expect to save 10 to 15 per cent commission by sourcing directly.

According Technopak’s estimates, large domestic and foreign retailers are planning investments worth RS 1.75 lakh crores (33 billion dollar) over the next five years. This will trigger massive economic activity and generate millions of jobs. But traders are unhappy because they feel it will create a monopoly of foreign players, which will adversely affect them since they won’t be able to compete. Small and medium enterprises (SMEs) are also apprehensive because foreign retailers will have an impact on the supply chain that are being fed by SMEs and government’s move will cause displacement of SMEs if it is not checked. The segment is demanding increase in the provision for 30 per cent compulsory sourcing from SMEs in the draft policy.

According to a recent report by Boston Consulting Group India’s organised retail is estimated at 28 billion dollar with around 7 per cent penetration but is expected to grow to 21 per cent and become a 260 billion dollar business over the next decade. As Govind Shrikhande, MD, Shoppers Stop, the largest departmental store chain in the country, says, “In the short term it is likely to benefit players who are looking to sell out. For others there will be no immediate change as opening up of the retail sector will not improve the infrastructure situation. This is something that the government needs to address so that in the long-term everyone in the industry gains.” The K Raheja group, which runs Shoppers Stop and the hypermarket chain, Hyper-City Retail, will consider bringing in investment through a foreign partner for its hypermarket format.

It is predicted that the overall effect of this bold move will accelerate India towards becoming the world's third-largest economy. Interestingly, the move to open up the multi-brand sector comes nearly 16 years after it was initially planned. It was blocked several times due to stiff opposition from traders, opposition parties and differences within respective coalitions. Critics had said opening the sector would lead to massive job losses. However, now there is more optimism in the air, time will tell how it works out for India’s benefit.