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Foreign investment in Indian retail

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Is the Indian government finally veering towards opening FDI (foreign direct investment) in retail? The signs are positive this time. In fact, stung by unabated food inflation, an inter-ministerial group have made a formal recommendation to open up multi-brand retail to FDI urgently and revamp agriculture produce marketing committee law, considered as effective “inflation-busting” measures.



he panel has recommended allowing multinational retailers such as Wal-Mart, Carrefour and Tesco to set up shops in the country because it will help keep food and commodity prices under check. The group headed by chief economic advisor Kaushik Basu has sent its suggestions to PM Manmohan Singh and finance minister Pranab Mukherjee. As Basu says, “It is time for India to allow FDI in multi-product retail and the inter ministerial group recommends that the government consider this at the earliest.” He went on to add "We are taking a clear position on FDI in multi-brand retail for the first time. Of course, it is a recommendation, not policy." Basu pointed out that China, Malaysia and Indonesia have had “palpable” benefits by opening up multi-brand retail to FDI.

It may be noted that global retailers such as Wal-Mart, Carrefour, Tesco and Metro AG have long sought greater access to a fast-growing but restrictive Indian retail sector that is dominated by mom and pop operators. The country’s retail industry is estimated at $400-billion and growing. However, critics including the Left and the BJP, feel opening up the sector will impact the livelihood of small shopkeepers and traders. Basu said along with FDI in retail, there was need for regulator to ensure that these new corporations do not become monopolistic and charge high prices felt the members. He allayed fears of small grocers and kirana stores by suggesting creation of several zones and restricting the number of large-format retail stores in each zone. Moreover, the market is too huge to hurt grocers. In a recent report, Business Monitor International had said retail sales in India ma




e that these new corporations do not become monopolistic and charge high prices felt the members. He allayed fears of small grocers and kirana stores by suggesting creation of several zones and restricting the number of large-format retail stores in each zone. Moreover, the market is too huge to hurt grocers. In a recent report, Business Monitor International had said retail sales in India may swell to $785 billion in 2015 from $396 billion in 2011 on economic growth, rising salaries and expansion of organized retail. The Boston Consulting Group estimates the size of organized retail market at $28 billion and expects it to grow nine times to $260 billion in 10 years. “The (retail) cake is so big and this will only help it grow further and create jobs,” Basu summed up.

Interestingly, retailers and industry experts feel allowing FDI will cut wastage because big players will build backend infrastructure. Basu feels that FDI in multi-brand retail would also help in narrowing the current account deficit. Attracting more FDI would be useful as it is not volatile like FII flow. At present, India allows 51 per cent foreign investment in single-brand retail and 100 per cent in wholesale cash-and-carry business. Companies such as Wal-Mart and Carrefour have already set up wholesale operations in the country and Reliance Retail too is looking at entering this space.

According to Dipak Dasgupta, Principal Economic Adviser in the ministry of finance, the share of organized retail could go up to 12 to 20 per cent of the domestic retail market once foreign investment is allowed from about 4 per cent now, besides improving productivity, and its spillover impact on the domestic retail sector. FDI flows in cash and carry wholesale trading totalled $1.78 billion from April 2000 to March 2010.






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