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Commentary

FDI in Retail Approved, More Bark Than Bite

The cabinet has approved Foreign Direct Investment (FDI) in Retail.

  • 51% in multi-brand retail (think Walmart, Tesco)
  • 100% in single-brand retail (like a Nike)
  • $100 million minimum investment, of which 50% must be in back-end
  • 30% of sourcing from SMEs in India
  • Only in towns with over 1 million population

This has pushed retail stocks up – Pantaloon Retail, for instance, is up 16% to 233. Even real estate stocks are up on the hope that if foreign players come, they might rent some of that massive amounts of vacant commercial real estate that is their nemesis.

FDI in retail was always something considered unacceptable as it would drive away the small trader and kirana shop. The Indian chains – from Hypercity to Big Bazaar to Easy Day (Bharti/Walmart) – have started to kick in and will eventually the competition will hurt.

Near my house an Easy Day has started up which has all but killed local businesses, who it must be said were both overcharging and giving really stale goods.

In my view, that inefficient small merchant must go out of business, as the cart puller did when taxis came, and as PCOs did when mobiles came around. Better and more efficient technology is better for us as a whole – in fact, even my neighbourhood merchants admit that they source from Easy Day now. It’s obviously much better for the rest of us that see about 20% reduction in our bills.

The problem still remains infrastructure, the APMC monopolies and a wonky tax system. WIth much of the foreign players’ efficiency based on good road or rail transport, it’s hard to see them replicate their model in India without major changes. The inter-state taxes – much of which will only get streamlined once GST comes in place – delay progress and cause unnecessary round tripping for tax avoidance. Finally, sourcing of agricultural products will need on-the-ground presence, which is a long drawn affair – ask ITC how long it has taken them to establish good direct-from-farmer sourcing deals.

Other factors are that India is a horrendous nation for decision making. Going by the recent past, it’s entirely likely that in a couple of years, the government “reverses” the decision to please some vote-bank. Who the heck will want to invest in such a situation?

Lastly, Europe has been the world’s financier for a while, and they are in some doo-doo right now. Investment plans will have to factor in a change in the world financial system.

I expect that many big players will make noises about India being part of their plans, but not much more. Meanwhile, the stocks that go up are probably going to see positive news for a while, so they may be worth a trade.

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