New Delhi: The government pulled a sensitive item in the reforms agenda out of cold storage on Tuesday, with the department of industrial policy and promotion (DIPP) releasing a discussion paper on permitting foreign direct investment (FDI) in multi-brand retail chains such as those run by the likes of Wal-Mart Stores Inc. and Carrefour SA around the world.
This move is fraught with political risk and comes a day after opposition parties joined hands for nationwide protests against rising inflation. There have been widespread fears that the entry of global retail giants could hurt kirana stores that dominate the retail trade in India and employ 33.1 million people, the most outside farming.
Photo: Harikrishna Katragadda/Mint
The government has tried to defuse some of these concerns, by suggesting in its discussion paper that the sector would be opened up to foreign firms in a “calibrated manner”. It has also pitched issues such as inflation control and employment into the discussion about FDI in multi-brand retail.
It has been suggested in the discussion paper that modern retailers with efficient cold storage chains could minimize wastage of fresh produce and ease food inflation. India currently lets around Rs1 trillion of fresh produce go waste and more than half of this can be brought to market if the proper farm-to-fork infrastructure is in place. The department has argued that “FDI in front-end retailing is imperative” to fund cold storage for farm produce.
Among the other indications that popular concerns are being taken on board, the discussion paper asks whether half the jobs created by new retail chains should be reserved for rural youth and cites data from China to show that big-box retailers do not necessarily kill the existing system of mom-and-pop stores.
Ahmed Raza Khan/Mint
Both industry and the stock market welcomed the baby step towards opening up the sector. “The retail industry in India needs access to more capital. It can definitely go into the investment (for) the supply chain. But we just cannot build the back-end without an equal amount of development in the front-end,” said Rakesh Biyani, CEO of Future Group.
Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs441 on the Bombay Stock Exchange. Shares of Shopper’s Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange’s key index rose 173.04 points, or 0.99%, to 17,614.48.
India currently allows 51% FDI in single-brand retail and 100% in cash-and-carry stores that can only sell to other retailers and businesses.
Thomas Varghese, CEO of Aditya Birla Retail Ltd, said he is in favour of allowing 49% FDI in multi-brand retail. “If you are allowing FDI, do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat from creating some back-end infrastructure,” he added.
To allay fears about the impact on small retailers once the big boys step in, the discussion paper has asked whether a Shopping Mall Regulation Act should be put in place to protect them.
“The unfounded fear that large retailer will kill small ones is wrong. There is room for both to grow over the next foreseeable future,” said Harsh Bahadur, general manager (wholesale) at Tesco Hindustan Wholesaling Pvt. Ltd. He added that if the government went ahead and allowed FDI, it would be “good news for the economy”.
Wal-Mart India’s president Raj Jain declined comment on the grounds that he hadn’t read the discussion paper.
An analyst appreciated the government’s willingness to finally get down to the business-end of policymaking.
“While there have been ongoing discussions for many years, this is very significant in putting down all these issues, talking about them very clearly and coming up with issues that we need to resolve,” says Saloni Nangia, vice-president (retail) at consultancy Technopak Advisors Pvt. Ltd.
Both the Bharatiya Janata Party and the Left parties are opposed to allowing FDI in multi-brand retail.
Ruhi Tewari also contributed to this story.