FDI On Multi Brand Retail Trading

By –Srishti Sett

Introduction

India’s retail industry is divided into organized and unorganized sectors.

India is ranked as the third most attractive nation for retail investment among 30 emerging markets.

Retail Contributes to 10% of India’s GDP.

FDI in Retail-A historical prospective

1995- World Trade Organization ‘s General Agreement on trade in services, both wholesale and retail came into effect.

1997-FDI in cash and carry(wholesale) with 100% rights under Government approval route.

2006-FDI in cash and carry (wholesale), up to 51% under the automatic route in single brand retail.(Press note 3 [2006] series).

2011-100% FDI in Single Brand Retail Permitted.

2012-51% FDI in Multi-Brand Retail Permitted.

Conditions on FDI in Multi Brand Retail Trading

Fresh agriculture produce may be unbranded.

Minimum amount to be brought in by the foreign investor would be US $ 100 Million.

50% of FDI to be invested in back-end infrastructure within three years of the first tranche of FDI.

Consolidated FDI Policy, Circular 1 of 2013.

30% sourcing from small and medium enterprise.

Self-certification by company to ensure compliance of conditions.

Retail sales outlets, may be set up in cities with a population of more than 10 Lakh as per 2011 census.

Consolidated FDI Policy, Circular 1 of 2013

Government will have the first right of procurement of agricultural products.

An enabling policy- the Government would be free to take their own decisions.

Retail trading in e-commerce not permissible in multi-brand retail trading.

Applications to be processed by the Department of Industrial Policy and Promotion before Government approval.

Consolidated FDI Policy, Circular 1 of 2013

Clarifications on Queries

30% sourcing from Small and Medium Enterprises

• The 30% sourcing will be reckoned only with reference to the front end store.

• The phrase used in the FDI policy is 'small industries' with maximum investment in Plant & Machinery at USD 1 million.

50% investment in back-end infrastructure

• Entire investment in back-end infrastructure has to be an additionality.

• investment in a company engaged in development of back-end infrastructure will not be treated towards the fulfillment of the conditionality.

Investment in Front-end / back-end infrastructure

• Investments in multiple infrastructure companies would not be counted towards fulfillment of condition.

• The back-end entity may be 100% owned by a foreign entity if the entity in MBRT is able to fulfill the conditions.

(Paragraph 6.2.16.5 of ‘Circular 1 of 2013-Consolidated FDI Policy’)

Small industry certification

• Certificate issued by District Industries Centre would be adequate authentication to confirm status of supplier as ‘small industry’

Population Restrictions on

operations

• Census data is the most authoritative source of population data, which is accepted by all the States.

State Discretion

• States which have opted for inclusion in the FDI policy have already been notified.

• FDI policy in MBRT is subject to the applicable State/Union Territory laws/ regulations.

(Paragraph 6.2.16.5 of ‘Circular 1 of 2013-Consolidated FDI Policy’)

Case 1: PepsiCo India-helping Farmers Improve yield and income

• Building PepsiCo‘s stature as a development partner by helping farmers grow more and earn more

• Making world-class agricultural practices available to farmers and helping them raise farm productivity.

• Facilitating financial and insurance services in order to de-risk farming.

• Introducing sustainable farming methods and practicing contact farming.

Development So FarToday Pepsico farming programme reaches out to more than 12,000 farmers across six states.

They provide superior seeds, timely agricultural inputs and supply of agricultural implements free of charge.

They have an assured buy-back mechanism at a prefixed rate with farmers.

Through their tie-up with State Bank of India, they help farmers get credit at a lower rate of interest.

They have arranged weather insurance for farmers through their tie-up with ICICI Lombard.

Case 2: Bharti Walmart-initiative through Direct Farm Project

Education Health & Hygiene

Sanitation & Biogas Waste Management

Advantages of FDI in Multi Brand Retail Trading

•Cost-conscious organized sector will prevent waste and loss.•This will make food available to the weakest and poorest segment of Indian society.

Better infrastructure will wipe out

inefficiencies in distribution systems.

•A well-regulated retail sector will help curtail some labour abuses.•They will get better working conditions and better wages.

Prevent labour exploitation

•Unorganized retail market is as large as 95% •The traditional market is very deep-rooted in our Indian Economy.

It will not destroy the unorganized

retail market

Frequently Asked Questions

I. How will farmers be affected by the policy on FDI in multi-brand retail trading?

Farmers will receive better remuneration for their produce.

Better prices from the reduction in post-harvest losses. FDI in multi-brand will result in strengthening of the

supply-chain infrastructure for all products. With 50% of total Foreign investment in villages,

would transform India through improved agro-processing and cold-chains .

Frequently Asked Questions

II. How will medium and small industries be impacted by the policy?

With 30% sourcing from Indian small Industries, small manufacturers will benefit.

Provide the necessary scales for the entities to expand capacities in manufacturing.

Create more employment and strengthen the manufacturing base of the country.

Enable the small enterprise to get integrated with global retail chains.

Frequently Asked Questions

III. Will this policy force small retailers to shut down?

Organized retail constitutes only 4% of retail trade and co-exist with the small “kirana” stores and the unorganized retail sector.

A strong competitive response from traditional retail, through improved business practices and technology up gradation.

Global experience also indicates that organized and unorganized retail co-exist and grow.

Frequently Asked Questions

IV. How will the policy help the rural youth? FDI in multi-brand retail trading will create a large

number of employment opportunities, in villages, in the range of activities from the backend to the frontend retail business.

Frequently Asked Questions

V. Does the policy have any safeguards against predatory pricing?

A strong legal framework in the form of the Competition Commission is available to deal with any anti-competitive practices, including predatory pricing.

Moreover, the calibrated approach in the policy will make it difficult for the entities to stifle competition.

Recommendations

Regulate

Modern

Retail

Upgrade

Traditional

Retail

Upgrade

Wholesale

Markets

Help Farmers Become competi

tive Supplier

Urban Planni

ng Laws

Regulation of unfair trade

practices

Regulatory

Framework

against Monopolistic Practic

es

Eventuality

Critical Analysis

Despite country wide speculation on the

plight of small retailers, India needs to take a lesson

from China where organized and

unorganized retail seem to co-exist and grow together.

India’s local enterprises will potentially receive an

up gradation with the import of advanced technological and

logistics management expertise from the foreign

entities.

It would lead to a more comprehensive integration of India into the worldwide

market and, as such, it is imperative for the

government to promote this sector for the overall economic

development and social welfare of the country.

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