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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.

  • people no longer have the money to buy in whole

  • My fear is that over time big retail (Walmart/Tesco/Carrefour) will kill all local grocery stores. After that the handful of big retail will divide up territories among them(unlike lakhs of small middlemen who can never make cosy arrangement). Surely big retail will bring unheard of technology and supply-chain-efficiencies. However with territory divided up, the technology and supply-chain-efficiency will be used to jack up profits rather than passing on the benefit to customer. In the long run, the customer will pay more for food.
    Deepak, your comments please. I would be relieved if I am proven wrong. I am really worried about this multi-brand-retail development.

    • I don’t think that will happen. Because a lot of retail in India is about credit also – the local shop next door where you go to buy urgent groceries. I was in Navi Mumbai when the big retail boom happened. A chain called Foodland fresh started close by home – and was hugely popular for a while. Then there was More, another chain, and then the hyper chains of Hypercity, Reliance Fresh and D-Mart. The close-to-home chains eventually shut down – the efficiencies were simply not there. The hyper marts succeeded because they could get low price in one store and save enormous costs.
      The local grocery model needs to die in some way – there is just too much of it. They don’t discount, some of them store horribly stale or even fake items, they don’t take card payments and so on. But there are advantages – you may be able to get temporary credit, they can deliver at home etc. So I think some will die, some will survive. The big businesses from abroad will make retail that much more efficient so the local stores can get stuff cheaper also!

      • debi says:

        Hi Deepak,
        I see cartel if FDI is allowed in retail. E.g Look how Idea , Vodafone , Airtel have formed a cartel to raise the prepaid call price by 20% on same week. This is a real instance. You know how pathetic Indian Regulators are.
        Another example is Australia. Do you know the retailers have made a cartel and the Grocery is very costly as compared to other countries.
        Let me know if telecom example is wrong.
        Thanks

  • Thanks Deepak. However my apprehensions persist. My thoughts are formed on the basis of an article on multi-brand-retail by Shekar Swamy. Unfortunately, googling is not leading to the article directly.
    Another fall out of MBR will be that it will lead to more number of employees than independent entrepreneurs in our society. I am not sure whether that is good or bad.

  • venkat says:

    correctly said its apmc act and state taxes thats killing new technology to get introduced.
    you dont need foreign owners for that.so fdi should not be alllowed.
    but indian ownership should be liberated by right taxation rules for change.
    f d i is wrong prescription .
    even though we have so much of saving rate why allow foreign capital for life time???

  • TAK says:

    100% FDI in single brand retail does not benefit anyone except the big brands.
    The additional investment will not be substantial. No new technology or supply chain efficiencies and no lower prices.
    So why allow this except possibly to get them to come to India and to say we too have a Gucci / Ferregamo store.

    • I suppose you own an Indian made TV and fridge and car 🙂 That argument applies for anything, why stop at retail, why not stop foreign investment in everything? REtail won’t hurt with FDI – Gucci and Ferragamo still have a market as does Bata (which, btw, is east european in origin).