100% FDI in single brand retail: From 'complete misnomer' to more 'jobs', industry reaction is a mixed bag

Opinion is divided among sector specialists and observers on the merits of the policy and a section pooh-poohed the government’s announcement.

Sulekha Nair January 10, 2018 19:05:05 IST
100% FDI in single brand retail: From 'complete misnomer' to more 'jobs', industry reaction is a mixed bag

Seeking to boost foreign investments in India in a big way, the government on Wednesday gave nod to an investor-friendly policy on Foreign Direct Investment (FDI) in single-brand retail allowing 100 percent FDI via the automatic route.

While the intent of the government is not questionable, the timing of the decision has come under scrutiny from a section of experts. Is the 100 percent clearance a little late in the day considering that those who were serious about coming to India when FDI approval allowed 49 percent under automatic route, and for FDI beyond 49 percent and up to 100 percent through government approval route?

Opinion is divided among sector specialists and observers on the merits of the policy and a section pooh-poohed the government’s announcement. They argue that even at beyond 49 percent and up to 100 percent, there were not many takers.

The hullabaloo being created in this regard is political noise, many of them insist, claiming the government is only trying to score brownie points in lieu of the announcement. “If you had a number of companies wanting to enter the country, considering India is a large market, then you could say that easing it totally now would open the floodgates,” said a retail expert.

“The 100 percent FDI in single brand retail announcement is a complete misnomer,” said Arvind Singhal, chairman, Technopak Advisors, a Delhi-based management consulting firm. Singhal is of the opinion that whoever wanted to come to India have and does not see how the latest announcement would change the retail scenario in India.

100 FDI in single brand retail From complete misnomer to more jobs industry reaction is a mixed bag

Representational image. Reuters

Although the announcement by the government looks enticing at first sight, there are few riders. The government has decided to permit single brand retail trading entity to set off its incremental sourcing of goods from India for global operations during initial five years, beginning 1 April of the year of the opening of the first store against the mandatory sourcing requirement of 30 percent of purchases from India. Incremental sourcing would mean the increase in terms of value of such global sourcing from India for that single brand (in rupee terms) in a particular financial year over the preceding financial year, by the non-resident entities undertaking single brand retail trading entity either directly or through their group.

“The 30 percent local sourcing norm does not translate to too much,” Singhal said as big entities buy in huge numbers in India while some luxury brands don’t source from India at all. The 30 percent rule makes a difference to companies that are small in size, he said.

Singhal said that the big companies that have set up shop in India are Ikea and HM, to name a few. "It isn’t that billions of dollars has come to India with 49 percent FDI and I don’t see how the situation will change to bring in billions of dollars to India with this announcement," he said.

Echoing Singhal’s thoughts, Anil Talreja, partner, Deloitte Haskins & Sells LLP, said he does not expect anything to change much for retailers. “There won’t be much money or investment for it will all depend on the business model.”

To invest in a market like India, the company that wants to invest would have to have enough business here before it decides to invest. “Those who want to come to India have already done so. Many others have opted for the franchise route or done it through partnership,” Talreja said.

In the financial year 2016-17, total FDI received was $60.08 billion, an all-time high. How much of this will change with the new announcement by the government?

The Confederation of All India Traders (CAIT) said the move will facilitate easy entry of MNCs (multi-national companies) in the retail trade. Terming it as a "serious matter for small businesses", the trade body claimed the move will hamper the welfare, upgradation and modernisation of existing retail trade.

The reform would help boost employment and bring in wide product choices for the consumers that will help grow the economy, believed Kumar Rajagopalan, CEO, Retailers Association of India. “It will ease the process for foreign as well Indian brands interested in being part of the Great Indian Retail Story. It is known that global companies take time to develop good suppliers as partners and hence the relaxed time frame for sourcing is conducive without compromising India's need to be a good sourcing hub for global brands,” Rajagopalan said.

The government has sent a clear message that it is serious about liberalisation. This announcement of the government allowing 100 percent FDI through automatic route bodes well for the government and the country, said the supporters of the announcement. The government has approached the automatic route through slow and sure steps, they said. First, the government abolished the Foreign Investment Promotion Board (FIPB), which vets and approves FDI proposals not cleared through the automatic route.

The retail sector is a major creator of jobs and with the prime minister being lambasted by the Opposition for the increasing unemployment situation, the announcement is a move in the right direction, say those who welcomed it. "This offers a scope for organising local and global retailers," said Anup Jain, managing partner at consumer and retail consulting firm Redback Advisory Services. The Indian retail market is divided into organised market valued at $60 billion which is only 9 percent of the total sector while the unorganised market constitutes the rest 91 percent of the sector, according to IBEF.

Jain said that when Future Group and Tatas wanted to have a tie-up, a number of approvals were needed. With the automatic route now, not much time will be wasted waiting for approvals and will see many local players being approached by foreign giants in the retail space for tie-ups. Not just that, said Jain, but retail stocks will have a positive momentum and Indian investors in the sector will now be eager to participate more. “Protectionism that we have been practising so far only hampers the flow of financial capital which will no longer be the case,” said Jain.

The government’s latest announcement will quicken the FDI process as governmental approval is not needed, said sector specialists and observers. “The approval through automatic route with respect to single brand retail trading will quicken the FDI clearance process as no prior government approval would be required. We expect that FDI in single brand retail trading sector will now gain further momentum due to the process not being subject to regulatory scrutiny and approval process," said Rabindra Jhunjhunwala, partner, Khaitan & Co.

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