FDI: The Hullabaloo

The government’s decision to allow FDI in retail saw uproar in both Houses of Parliament. The opening up of the $450 billion retail market for the global supermarket giants is much talked about besides the high optimism for retailers the world over. Definitely a welcome change for the industry, relaxation of FDI will bring along a whiff of fresh air for the retail marketplace as a whole. A few years down the line, everyone including the retailers, franchisors, SME’s, customers will be in a win-win situation.

The NEW draft

According to the new proposed FDI draft, the government will allow 51 per cent foreign direct investment in multi-brand retail and raise the cap on foreign investment in single-brand retailing to 100 per cent from 51 per cent. However, both these extensions bring along a set of ‘Terms & Conditions’ applied! Strict sourcing requirements have been laid down to protect everyone’s interest. Previously, India allowed 51 per cent foreign investment in single-brand retailing and 100 percent for wholesale operations and none for multi-brand retailing. The policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure. For single brand retail, only those products that are branded during manufacturing and the International label is the owner of the brand, will be allowed for sale.

Win-win for everyone

For most of the industry, the opening up of the FDI is going to be a win-win situation as a whole. The customers will get a wider variety to choose from and also a better price packet for it. The small industry will also benefit as retailers as a compulsion have to procure 30 per cent stuff from the small industry, kicking out the speculation that the small industry would go out of business. Infrastructure would also get a boost as more retail spaces would be needed to accommodate the retail rush of brands, Indian as well as international. The entry of more brands in the retail marketplace will create more opportunities for franchisees, potential investors and those looking for jobs in this sector. As many as 10 million jobs could be created in the next two to three years. Global retail expertise would be sought as well which would come along with the entry of international brands. Mehul Choksi, CMD – Gitanjali Gems: “Opening up FDI in retail will accelerate the growth of branded and organised players like us we can have strategic partners and inflow of fund to improve the ‘retailonomics’ of in the country. For international retailers it’s an opportunity to be a part of Indian consumption story as well as bring in revolution in the retail experience with their expertise. Beside window for luxury players to partner with Indian brands, we expect chains like Walmart, Carrefour and M&S also to spread their presences and formats.” Supply chain operations and distribution channels will also move up the ladder towards perfection creating a better shopping experience. Govind Shrikhande, Customer Care Associate & Managing Director, Shoppers Stop, says, “FDI will not affect the small retailers as at least 50 per cent of total FDI being invested in ‘back-end infrastructure’ which will include investment on processing, manufacturing, distribution, design improvement, quality control, packaging, warehouses, storage, logistics and related infrastructure.”Heavy flow of investments is one of the greatest advantages seen of the opening of the FDI norms along with the plethora of opportunities for local brands to create relationships with international players. The real estate sector which has been moving slowly lately can also look at better times ahead. With the likelihood of international players entering the Indian retail space, there sure will be a surge of retail spaces. Retail real estate market is expected to grow at a CAGR of 25 per cent a year for the next five years and with the opening of the FDI, the numbers will definitely go up.

Concerns

Though the recommendations of changes in FDI norms have been welcomed with open hands by the retail industry there is a section condemning it and have their concerns to reason. The utmost concern is that small traders will be out of work as the big fish in the pond will take over most of the business. Job reduction to a great degree will also be seen in the manufacturing and service industries. As a result the opening of the FDI is said to dislodging the existing marketplace rather than augmenting opportunities. Pricing can also be a concern wherein it is felt that retail biggies will become monopolist by resorting to predatory pricing.

Boost to small industry

As per the new FDI reforms, retailers will have to procure 30 per cent stuff from SME’s in India. Even the biggest of the biggies will have to procure manufactured and processed products from the small industry. Small industries have been classified as units which have a total plant and machinery investment not exceeding Rs 1.25 crore. Back end has also been clearly defined as the investments made towards processing, manufacturing, distribution, design improvement, quality control and packaging. FDI will be allowed in cities with a population of more than one million as per the 2011 census and India has 51 such cities.

Other third world countries that allowed 100 per cent FDI in retail are witnessing impressive growth figures which encouraged India to take this step. It’s a wait and watch situation now, if approved, the industry will watch which brand enters Indian shores, which won’t… how much foreign investment will be pumped in, international tie-ups and so on. Speculations are on a high but optimism seems to be floating in the air.

The government’s decision to allow FDI in retail saw uproar in both Houses of Parliament. The opening up of the $450 billion retail market for the global supermarket giants is much talked about besides the high optimism for retailers the world over. Definitely a welcome change for the industry, relaxation of FDI will bring along a whiff of fresh air for the retail marketplace as a whole. A few years down the line, everyone including the retailers, franchisors, SME’s, customers will be in a win-win situation.

The NEW draft

According to the new proposed FDI draft, the government will allow 51 per cent foreign direct investment in multi-brand retail and raise the cap on foreign investment in single-brand retailing to 100 per cent from 51 per cent. However, both these extensions bring along a set of ‘Terms & Conditions’ applied! Strict sourcing requirements have been laid down to protect everyone’s interest. Previously, India allowed 51 per cent foreign investment in single-brand retailing and 100 percent for wholesale operations and none for multi-brand retailing. The policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure. For single brand retail, only those products that are branded during manufacturing and the International label is the owner of the brand, will be allowed for sale.

Win-win for everyone

For most of the industry, the opening up of the FDI is going to be a win-win situation as a whole. The customers will get a wider variety to choose from and also a better price packet for it. The small industry will also benefit as retailers as a compulsion have to procure 30 per cent stuff from the small industry, kicking out the speculation that the small industry would go out of business. Infrastructure would also get a boost as more retail spaces would be needed to accommodate the retail rush of brands, Indian as well as international. The entry of more brands in the retail marketplace will create more opportunities for franchisees, potential investors and those looking for jobs in this sector. As many as 10 million jobs could be created in the next two to three years. Global retail expertise would be sought as well which would come along with the entry of international brands. Mehul Choksi, CMD – Gitanjali Gems: “Opening up FDI in retail will accelerate the growth of branded and organised players like us we can have strategic partners and inflow of fund to improve the ‘retailonomics’ of in the country. For international retailers it’s an opportunity to be a part of Indian consumption story as well as bring in revolution in the retail experience with their expertise. Beside window for luxury players to partner with Indian brands, we expect chains like Walmart, Carrefour and M&S also to spread their presences and formats.” Supply chain operations and distribution channels will also move up the ladder towards perfection creating a better shopping experience. Govind Shrikhande, Customer Care Associate & Managing Director, Shoppers Stop, says, “FDI will not affect the small retailers as at least 50 per cent of total FDI being invested in ‘back-end infrastructure’ which will include investment on processing, manufacturing, distribution, design improvement, quality control, packaging, warehouses, storage, logistics and related infrastructure.”Heavy flow of investments is one of the greatest advantages seen of the opening of the FDI norms along with the plethora of opportunities for local brands to create relationships with international players. The real estate sector which has been moving slowly lately can also look at better times ahead. With the likelihood of international players entering the Indian retail space, there sure will be a surge of retail spaces. Retail real estate market is expected to grow at a CAGR of 25 per cent a year for the next five years and with the opening of the FDI, the numbers will definitely go up.

Concerns

Though the recommendations of changes in FDI norms have been welcomed with open hands by the retail industry there is a section condemning it and have their concerns to reason. The utmost concern is that small traders will be out of work as the big fish in the pond will take over most of the business. Job reduction to a great degree will also be seen in the manufacturing and service industries. As a result the opening of the FDI is said to dislodging the existing marketplace rather than augmenting opportunities. Pricing can also be a concern wherein it is felt that retail biggies will become monopolist by resorting to predatory pricing.

Boost to small industry

As per the new FDI reforms, retailers will have to procure 30 per cent stuff from SME’s in India. Even the biggest of the biggies will have to procure manufactured and processed products from the small industry. Small industries have been classified as units which have a total plant and machinery investment not exceeding Rs 1.25 crore. Back end has also been clearly defined as the investments made towards processing, manufacturing, distribution, design improvement, quality control and packaging. FDI will be allowed in cities with a population of more than one million as per the 2011 census and India has 51 such cities.

Other third world countries that allowed 100 per cent FDI in retail are witnessing impressive growth figures which encouraged India to take this step. It’s a wait and watch situation now, if approved, the industry will watch which brand enters Indian shores, which won’t… how much foreign investment will be pumped in, international tie-ups and so on. Speculations are on a high but optimism seems to be floating in the air.