Govt likely to allow FDI in multi-brand retail; initiate with six metro cities

The Indian government is expected to permit Foreign Direct Investment (FDI) in multi brand retailing only in the six mega cities. This development is on the recommendation made by the Department of Commerce & Industry to allow such stores in cities with over one million population is premature. The six metros in which FDI in multi-brand retailing will be permitted are Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad.

As per the note prepared by the commerce ministry for the committee of secretaries on the FDI in retail has said the cities will be selected on the basis of 2011 census, as per the 2001 census, around 35 cities have more than 1 million population and the number will be higher in the 2011 census.

By adopting this calibrated liberalization in retails sector (by keeping other cities out) government is trying to avoid political resistance regarding the impact of the opening of the multi-brand retailing to FDI on small retailers. The FDI in multi-brand retails has several riders; state governments may get power to decide if they want to allow foreign retailers to open the front-end store in their cities, the policy also say minimum of 50% investment should be in back end infrastructure creation, the minimum investment is $100 million, around 30% manufactured products should be outsourced from Small and Medium Enterprises (SME).   

Currently, $400 billion Indian retail sector is dominated by the unorganized retailers or local Kirana stores. At present government allows 51% FDI in single-brand retail and 100% in wholesale cash and carry business. Global retailers like Wal-Mart and Carrefour have already opened wholesale operations in the India.

The calibrated approach adopted by the Indian government is based on the China model. China allowed foreign investment in 1992, but only in six major regions and cities and limited foreign ownership to 49%. The number of foreign retailers operating large store was restricted to 50, it allowed 100% foreign investment in 2004. The China has been able to attract huge foreign investment without affecting its small retailers or domestic retail chains.

With 15 million stores, India’s retail sector is highly fragmented. Only 4% outlets have more than 500 square feet space. The other 96% are in the unorganized sector. All important ministries has supported foreign investment in multi-brand retail sector, Indian government’s policy on retail investment will also help in increasing the country’s FDI, which fell by 25% to $19.5 billion in last financial year.