New Delhi: The Indian government’s reform programme, stuck because of the many corruption scandals that have rocked the administration over the past year and more, made its most significant advance in a long while on Thursday when the cabinet freed up overseas investment norms for the retail sector.
In another long-awaited reform move, the cabinet approved the draft Companies Bill, 2011, that will replace 55-year-old legislation and is aimed at increasing the accountability of firms while making it easier for them to do business by cutting red tape. The proposed Bill is set to be introduced in Parliament in the current winter session.
According to the agenda note that was placed before the cabinet, the liberalized retail norms include 100% foreign direct investment, or FDI, in single-brand retail, and 51% in multi-brand retail with some riders. Currently, 51% FDI is allowed only in single-brand retail, and 100% in the cash and carry, or wholesale, segment.
The move was welcomed by Raj Jain, managing director and CEO of Bharti Walmart.
“We believe that allowing 51% FDI in multi-brand retail is a first important step,” Jain said in a statement. “This change will positively impact the Indian market and its people and will also contribute towards India’s image as one of the world’s fastest growing economies and a welcoming destination for international businesses.”
The $450 billion retail industry is currently dominated by small family-run shops, with organized retail comprising about 10% of the market.
“We will need to study the conditions and the finer details of the new policy and the impact that it will have on our ability to do business in India,” Jain said.
In the case of multi-brand retail, fresh farm produce cannot be branded and 30% of the inputs have to be sourced from small enterprises, as per the agenda note. Multi-brand entities will have to bring in an investment of $100 million (Rs500 crore), it said. As for FDI in single-brand entities, the retail presence has to be directly through the owner.
FDI in India stood at $22.5 billion between January-September this year, a 41% increase over the corresponding period last year.
Prime Minister Manmohan Singh’s United Progressive Alliance (UPA) government has pressed forward with the liberalization in the face of resistance from opposition parties as it seeks to fight inflation on the one hand and needs overseas investment to create jobs and boost the economy, which has been slowing amid global uncertainty, on the other.
States will, however, have the freedom to decide whether they should allow multi-brand retail chains with foreign partners to be located in their territory.
Reform proponents contend that overseas retail chains will invest in back-end infrastructure such as cold and supply chains, making them more efficient and ensuring that farmers get paid more even as consumers pay less.
“We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation,” said Jain.
The industry department and an inter-ministerial group headed by chief economic adviser to the finance ministry, Kaushik Basu, had backed FDI in multi-brand retail, maintaining that it will help moderate the high level of food inflation in India.
Food inflation, which was at double digits in all of 2010, started declining in May. However, in October, it again touched the double digit mark at 11.06%. Figures released on Thursday showed food price inflation had fallen to 9.01% in the week ended 12 November from 10.63% in the previous week.
Currently, 30-40% of fresh produce goes waste and more than half of this can be brought to the market if the proper farm-to-fork infrastructure is in place.
“The biggest beneficiary... would be the small farmers who will be able to improve their productivity and realization by selling directly to large organized players and therefore disintermediate the current value chain,” said Chandrajit Banerjee, director general, Confederation of Indian Industry. “This move is expected to substantially benefit consumers also by making available farm produce at much lower prices.”
The move may help domestic companies reduce some of their debt.
“We will definitely look to align and recapitalize our debts,” said Anand B., finance director, Future Group, parent of India’s largest listed retail company, Pantaloon Retail (India) Ltd, which has debt of Rs4,200 crore and a market capitalization of Rs5,399 crore. It has aggressive expansion plans to add 9 million sq. ft over the next three to four years to its existing footprint of 15.5-16 million sq. ft.
Reliance Retail, the retail unit of Mukesh Ambani-led Reliance Industries Ltd, has 22 formats and has been aggressively expanding its retail business over the past few years to achieve revenue of Rs5,019.71 crore in fiscal 2011.
“We have been focused on expansion and scale and it is life as usual for us,” said Bijou Kurien, president and chief executive, lifestyle, Reliance Retail. He said the reform will benefit foreign retailers seeking to enter India, allow those already present in the country to enter the front-end and help cash-strapped domestic retailers seeking investments.
Metro Cash and Carry India Pvt. Ltd, which runs a self-service wholesale business, doesn’t plan to change direction.
“There are currently no plans to enter the Indian market with one of our retail sales lines,” said a spokesperson. The German firm operates eight wholesale stores and earlier this month announced plans to open eight-ten such stores in the country annually in the next four years, with an investment of around Rs2,400 crore.
The issue, which has been debated since 2007, initially faced a stiff challenge from within the ruling Congress party, apart from the opposition.
The ministry of commerce and industry had then asked the Indian Council for Research on International Economic Relations (Icrier) to study the impact of large companies on the unorganized sector. Icrier had given its nod for FDI up to 49% in 2007.
The Bharatiya Janata Party (BJP) made clear its opposition to the move.
“This is totally unacceptable and we will protest against it,” said Prakash Javadekar, BJP spokesperson. “We are opposed to the fact that it would create large scale unemployment.”
The Left parties are also opposed to the step. “This is a decision which is going to grossly affect the livelihood of crores of people who are working in the retail trade sector,” said Brinda Karat, politburo member of Communist Party of India-Marxist (CPM).
“A government which has utterly failed to create new jobs is now taking away livelihood from so many people,” added Karat.
Sudhir Kumar Panwar of the Kisan Jagriti Manch, a farmers’ group, was also critical of the move.
“It is a hasty decision, the sourcing model for agriculture produce is not spelt out,” said Panwar. “Due to the unequal playing field, corporate giants will exploit the small and marginal farmers.”
West Bengal chief minister and Trinamool Congress chief Mamata Banerjee had also expressed her reservations ahead of the cabinet meeting. Her party is a constituent of the UPA.
“Let the matter come in our party, we will discuss it in our Parliamentary committee,” Banerjee said during a visit to Delhi.
The Congress party considered it a “good move,” said spokesperson Rashid Alvi. “This will increase the flow of money from outside the country.”
The proposed Companies Bill, once approved by Parliament, will be applicable to around 800,000 companies registered across the country.
The Bill is expected to check fraud more effectively with a better monitoring mechanism and higher penalty provisions for wrongdoers including promoters.
A senior law ministry official who did not wish to be named confirmed late on Thursday that the Bill had been cleared by the cabinet. He added that the Bill was likely to be introduced in Parliament in the ongoing winter session.
Work on the Bill, which also makes it easier to open and shut companies, started in 2004. It was first introduced in Parliament in 2008 but lapsed after the House was dissolved on account of general elections. The ministry of corporate affairs has been struggling to reintroduce the Bill in Parliament for the last two years.
It will also introduce concepts that are new to India, including one-person companies and class-action suits.
In September, the Prime Minister’s Office asked the corporate affairs ministry to expand the role of independent directors, increase the representation of women on boards, and strengthen the Serious Fraud Investigation Office (SFIO), a multi-disciplinary body comprising experts in the field of law, accountancy and taxation among others.
The Bill also emphasises the role of independent directors and calls on companies to set aside a proportion of profitfor corporate social responsibility.
Reuters and Mint’s Asit Ranjan Mishra and Anuja contributed to the story.