Background on FDI retail

source: pib.nic.in

EXISTING POLICY

Ø  FDI in Multi Brand Retail Trading (MBRT) is prohibited.

Ø  Foreign direct investment (FDI),  up to 51%, in the Single Brand Retail Trading (SBRT) sector, is permitted, under the Government/FIPB route, subject to the following conditions:

(a)    Products to be sold should be of a ‘Single Brand’ only.

(b)    Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.

(c)    Single Brand’ product-retailing would cover only products which are branded during manufacturing.

(d)    The foreign investor should be the owner of the brand

FDI in SBRT was first permitted vide Press Note 3 (2006), dated 10.2.2006.

RATIONALE FOR LIBERALIZATION

Leveraging foreign investment in supply chain infrastructure

Ø  Lack of investment in the logistics of retail chain creating inefficiencies in the food supply chain.

Ø  Though India is the second largest producer of fruits and vegetables (about 200 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT, 80% of this  is used only for potatoes.

Ø  Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular.  Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57 per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions.

Ø  As per some industry estimates, 35-40% of fruits and vegetables and nearly 10% of food grains in India are wasted. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route.  In the absence of FDI in front-end retail, investment flows into this sector have been insignificant.

Ø  The consequences of inadequate infrastructure are:

• Indian farmer realizes only 1/3^rd of the total price paid by the final consumer as against 2/3^rd with higher degree of retail.  A World Bank Study of 2007 demonstrates that the average price a farmer receives for horticulture produce is barely 12 to 15% of what is paid at the retail outlet.
• An 11th Plan working group has estimated a total investment of Rs. 64,312 crores in agricultural infrastructure.  A storage capacity gap of 35 million tonnes has been assessed, requiring an estimated investment of Rs. 7,687 crores during the 11th Plan.

Bringing supply chain efficiencies

Ø  Foreign retail majors have gained decades of experience, technologies and management practices which will ensure supply chain efficiencies.

Medium-term impact on regulating food inflation

Ø  The opening up of Multi Brand Retail will also have a salutary impact on food inflation as it would contribute to savings to the food which perishes on account of inadequate infrastructure.

Securing remunerative prices for the farmers

Ø  In the present dispensation, there is a complex chain of procurement involving several middlemen.  FDI in retail will create the enabling environment and it is expected that progressive States will undertake gradual reform of APMC Act which will ensure direct procurement, at least of horticultural produce from farmers to enable them secure remunerative price.   

Employment opportunities

Ø  Huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistic management and the front-end retail business.

Ø  Industry estimates suggest employment of one person per 350-400 sq.ft of retail space, about 1.5 million jobs will be created in the front-end alone in the next 5 years.  Assuming that 10% extra people are required for the back-end, the direct employment generated by the organized retail sector in India over the coming 5 years will be close to 1.7 million jobs.  Indirect employment generated on the supply chain to feed this retail business will add millions of jobs.       

MULTI-BRAND RETAIL FDI POLICY IN OTHER COUNTRIES

S.No.	Country	FDI Limits	Benefits	Remarks
1.	China	100%	·   First permitted in 1992 with foreign ownership restricted to 49%, progressively lifted and now no restrictions. ·   Over 600 hypermarkets opened between 1996 and 2001 ·   The number of small outlets (equivalent to ‘kiranas’) increased from 1.9 million to over 2.5 million ·   Employment in the retail and wholesale sectors increased from 28 million people to 54 million people from 1992 to 2001.	Impressive growth in retail and wholesale trade.
2.	Thailand	100%	·   Referred to a country where FDI had an adverse effect on the local retailers. ·   Has a limited capital requirement for retail and wholesale outlets.	Growth in agro processing industry.
3.	Russia	100%	·   Supermarket revolution took place in 2000s. ·   Heavy growth registered.
4.	Indonesia	100	·   Modern retail took off in 1990s. ·   No limit on number of outlets ·   Matahari is leading chain.
5.	Brazil, Argentina, Singapore & Chile allow 100% FDI in retail sector while Malaysia permits FDI to a certain limit.

Cabinet decision

To permit FDI in MBRT in all products, in a calibrated manner, subject to the following conditions:

ü  FDI in Multi Brand Retail Trade (MBRT) may be permitted up to 51%, with Government approval;

ü  Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded. 

ü  Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.

ü  At least 50% of total FDI brought in shall be invested in `backend infrastructure`, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc.  Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.

ü  At least 30% of the procurement of manufactured/ processed products shall be sourced from `small industries` which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a `small industry` for this purpose.

ü  Self-certification by the company, to ensure compliance of the condition as above, which could be cross-checked as and when required. Accordingly, the investors to maintain accounts, duly certified by statutory auditors.

ü  Retail sales locations may be set up only in cities with a population of more than 10 lakh as per 2011 Census only 53 cities qualify for FDI in multi-brand retail out of nearly 8000 towns and cities and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.

ü  The FDI in multi-brand retail is being opened in 53 cities only with population of 1 million and for the rest of the country, current policy regime will apply.  In the current regime, 100% FDI is allowed upto wholesale cash and carry point from which franchise/small retailers are able to source quality products for sale to the public at large.

ü  Government will have the first right to procurement of agricultural products;

To permit 100% FDI in single brand retail trading, subject to the following conditions:

ü  FDI in single brand retail trading may be permitted up to 100% with Government approval;

ü  Products to be sold should be of a ‘Single Brand’ only.

ü  Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.

ü  ‘Single Brand’ product-retailing would cover only products which are branded during manufacturing.

ü  The foreign investor should be the owner of the brand.

ü  In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen. `Small industries` would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a `small industry` for this purpose. The compliance of this condition will be ensured through self-certification by the company, which could be subsequently checked, by statutory auditors, from the duly certified accounts, which the investors will be required to maintain.

Condition of 30% sourcing from small scale sector

ü  30% sourcing is to be done from micro and small enterprises which can be done from anywhere in the world and is not India specific. However, in this case, it has been stipulated that 30% sourcing will be done from micro and small enterprises having plant and capital machinery worth US 1 million.

ü  This condition will ensure that our SME sector, including artisans, craftsman, handicraft and cottage industry benefits, especially in sectors like textiles, gems and jewellery, leather and jute.

This condition is applicable both for Multi-brand retail in all cases and for single brand retail in cases where foreign equity exceeds 51%.

Apprehensions

Rationale for enhancing FDI ceiling to 100% in single brand retail trading.

In the last 5 years, under the current regime of 51% FDI in single brand retail, foreign direct investment of only US$ 44.45 million have been received, constituting barely 0.03% of total FDI inflows.  Globally, single brand retail follow a business model of 100% ownership and global majors have been reluctant to establish their presence in a restrictive policy environment.  The current cap of 51% confers a right to pass all ordinary resolutions, while enhancing cap to 100% will confer full ownership and control.