The Hindu Business Line : Pushing for retail FDI

JUST when the debate on whether foreign direct investment (FDI) should be allowed in retailing was losing steam, with the Government appearing uncertain on whether this would be a good move given the continued opposition from the Left parties, the Indian Council for Research on International Economic Relations (ICRIER) has stoked the fire again. The Council has advocated an unequivocal opening up of retail to FDI, though in a phased manner over a 3-5 year period.

ICRIER has recommended that at least 49 per cent FDI be allowed in the retail industry initially, but since the sector is highly fragmented and domestic retailers are still in the process of consolidating their position, the opening up should be gradual.

Dismissing the fears of many Indian retailers of the loss of a level playing field if foreign retail giants set shop in India, ICRIER Director Arvind Virmani says opening up the sector to foreign investment, will actually help the existing retailers on several fronts. "And keeping their fears in mind, we have not advocated a 100 per cent opening up to begin with. The gradual opening up will help them deal with increased competition," he says.

Further, the study has found that even though there are apprehensions among organised retailers that foreign retailers would drive them and unorganised retailers out of business, about 48 per cent of the unorganised retailers felt that the impact of foreign retailers on their business would be the same as that of growth in domestic organised retailers.

The study strongly advocates that FDI should be allowed in retailing since it would speed up the growth of organised formats in the country. It found that organised retailing has significant backward linkages through setting up of supply chains, investment in food processing industry and manufacturing units, increased productivity of agriculture, growth of interlinked sectors such as tourism and IT. Consumers have also gained from organised retailing since it leads to lower prices, improves the quality of products and widens the choice of products available to consumers, ICRIER finds, adding that the slow growth of organised retailing is slowing down the process of development of allied sectors such as the food processing industry, and textile manufacturing among others.

Given the fact that the Indian retail sector is highly fragmented and domestic retailers are in the process of consolidating their position, the study recommends that the opening up of the FDI regime should be gradual - over a 3-to-5-year timeframe - to give the industry enough time to adjust to the changes. "In the initial stage, FDI up to 49 per cent should be allowed which can be raised to 100 per cent in 3-to-5 years depending on the growth of the sector. FDI cap below 49 per cent would not bring in the desired foreign investment," the study points out.

It added that since foreign retailers are allowed to enter the market through other routes, the existing ban on FDI has not really acted as an entry restriction. "On the contrary, the country is losing foreign investment while the entry process has become non-transparent and complicated."

It is learnt that several players, including French retail giant Carrefour, Wal-Mart, 7-Eleven and Auchan are evaluating entry into India if restriction on FDI is removed. In fact, Pricewaterhouse Coopers (PwC) has ranked India among the six most attractive destinations for investment in retailing alongside China, Turkey, Thailand, Malaysia and Hungary.

The study has further found that almost all major developed and developing countries have allowed foreign investment in retailing. Some have imposed certain other restrictions (for example, minimum capital requirement, sourcing conditions and so on) while others have opened up the sector in a phased manner to allow the domestic retailers to adjust to the changes. However, the experience of other countries shows that a major part of FDI is now directed towards the retail sector. While, over a period of ten years, the share of organised retailing in the total retailing sphere has grown from 10 per cent to 40 per cent in Brazil and to 20 per cent in China, in India it is only two per cent (between 1995-2005).

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