FDI reform: Why single brand retail may not see a single dollar of fresh money

The devil has always been in the detail. And it was no different in the case of liberal FDI norms, which the government announced with much fanfare across nine sectors last week.

A government press release promised the moon that Monday afternoon but now, when the changes have been notified, the picture does not seem quite as rosy. The notified changes fall short of what was actually promised.

For India’s airlines, initial euphoria over 100% foreign investment permission has been tempered by the revelation that such airlines may not be able to fly overseas at all. Basically, the reforms at least for airline ownership have been merely on paper. Now, it seems the single brand retail reform is also being panned as experts question several clauses in the explanatory Press Note 5, which notified the new FDI regime over the weekend.

For one, though the government seems confident of its meaning, the industry has largely been left confused over what exactly is meant by “state of the art / cutting edge technology" companies.

“There is no definition of state-of-the-art/cutting edge technology. These terms anyway cannot be defined, leaving any such proposals for investment from foreign players subject to different interpretations,” says Arvind Singhal of Technopak.

This means opening up single brand retail store by Apple, for example, may not happen despite the new FDI norms. Lack of clarity on simple terms which are crucial to avail relaxed sourcing norms, could be the undoing of this policy.

Kartick Maheshwari, Partner at Khaitan & Co, points out that the press release which was issued by the government on June 20 and the Press Note which notified these changes later give out different interpretations.

“There is no 3-year blanket waiver from local sourcing norms (as promised in Monday’s press release). The sourcing exemption for single brand retailers whose product line-up is ‘state of the art / cutting edge technology’ and where local sourcing is not possible has been reflected as 3 years (not 5 years as promised in the press release). As such, the press note undoes the significant relaxations announced for this sector by the Union Government.”

He says the implementation of the initial announcement needs to be revisited or there will be little improvement in investments in the single brand retail sector. The confusion over whether the earlier, mandatory local sourcing for single brand retail firms has been relaxed for all, those which fall under the cutting-edge/state-of-the-art category only or none prevails. Doubts also remain over the extent of this exemption.

Not just definition of which brands fall under these relaxed norms, the interpretation of how relaxed the norms are also vary. Anil Talreja, Partner at Deloitte in India says a definition of what is state-of-the-art/cutting edge is there in the Press Note. He also interprets the note to mean that such companies will now be exempt from 30% local sourcing norms for three years after they set up their first store. And they can subsequently comply with this norm for the next five years by sticking to it through cumulative sourcing instead of complying with an annual sourcing amount.

“The government has recognised difficulties being faced by foreign investors due to sourcing requirements… This is not a big bang change though. The government will have to see the effects of these baby steps before making further changes,” he said.

A third point which has created confusion among the industry watchers is about total opening up of the food retail sector on which multiple restrictions on multi-brand retail also apply.

A BigBasket or any other food retailer also sells FMCG, other non-food products. To get FDI, what should such retailers do now?

“While 100% FDI is permitted in food products sector, most of the retailers trading food products also sell non-food household items; thus leading to challenges in implementation,” said Subrata Ray and Kinjal Shah of rating agency ICRA noted this in their report.

Non-food retail entails a host of conditions for FDI which include retailing only in one million-plus cities, mandatory investment size, 30% sourcing from micros and SMEs etc. To bypass these restrictions, will food retailers then separate their food and non-food businesses, set up separate arms and further complicate matters?

One industry expert pointed out that with these confused signals, not a single dollar of foreign investment may actually arrive in India’s single brand retail stores.

According to an analysis in the Business Standard, the sectors that saw liberalisation in FDI last week account for a small share of overall FDI inflows into India.

Trading (including retail) and pharmaceuticals together account for just 4% share of total overseas equity inflows in the last 16 years. With the complete dissonance between what the government promises and what it delivers, the share of retail trade in overall FDI inflow is unlikely to rise anytime soon.