New Delhi/Mumbai: The government moved a step closer to allowing majority foreign direct investment (FDI) in multi-brand retail after the committee of secretaries (CoS), headed by cabinet secretary Ajit Kumar Seth, gave its approval on Friday.
The recommendation of the committee to permit 51% FDI in multi-brand retail will now go to the cabinet committee on economic affairs, which will take a final decision on conditionalities to be imposed and the level of FDI to be allowed.
An official speaking on condition of anonymity said that while a few secretaries preferred 49% FDI, the majority view was to allow 51%. The official added that the industry department will decide when the proposal should be sent to cabinet.
“The committee of secretaries, which met under cabinet secretary Ajit Kumar Seth, also decided that the overseas mega retail chains will have to pump in at least half of their investment in the back-end supply chain,” PTI reported, citing an unnamed person.
The department of industrial policy and promotion (DIPP) had recommended that states be given the freedom to decide on the setting up of multi-brand retail stores. The department had also said these stores should only be located in cities with at least one million people as per the 2011 census. Details of the recommendations of CoS were not immediately available.
The CoS decision comes five years after India allowed 51% FDI in single-brand retail and 100% FDI in wholesale retail through the automatic route.
Global retailers such as Wal-Mart Stores Inc., Carrefour SA, Tesco Plc and Metro AG have long been waiting to enter the lucrative Indian market. India, however, had been unable to put together a consensus on allowing foreign investment in multi-brand retailing because of concerns that this could wipe out the smaller family-run stores.
The issue, which was being debated since 2007, initially faced a severe challenge from within the ruling Congress party as well as from opposition leaders. According to a widely publicized report, the United Progressive Alliance chairperson Sonia Gandhi asked Prime Minister Manmohan Singh to examine the impact of the decision on owners of local, or kirana, stores before allowing FDI in the highly sensitive sector.
“It’s a great move to open the sector, but can’t really say much right now as much of it depends on the caveats and fine print,” said Thomas Varghese, chief executive officer (CEO) of Aditya Birla Retail Ltd and chairman of the Confederation of Indian Industry’s national committee on retail. The government should take up more such strategic investment and business development issues, he added.
There are a lot of riders to the FDI proposal, including state governments also having to give clearance to the retailers, said Bijou Kurien, president and CEO (lifestyle) at Reliance Retail.
“The players who are to come here such as Wal-Mart, Tesco, Carrefour are all already here,” he said. “As such, the retail penetration and environment in the country will not change much. But what this policy will enable is that there will be a lot more commitment from multinationals and serious investments on a much larger scale.”
“As for Reliance, we already have aggressive growth plans and will continue to scale our business on our own,” he added.
If FDI is allowed with the riders that were discussed earlier, of $100 million (Rs 445 crore) investment and other such clauses, it will still need to be seen over what time frame these investments have to be made (one year or two years), said Pinakiranjan Mishra, a partner and who leads the retail and consumer products practice at Ernst and Young. “The time frame itself will have implications on the investments.”
The opening up of FDI will help retailers raise money, which has been a challenge for the sector, he said. “Also, this will help in creating a whole new parallel economy of suppliers and vendors who can gain scale and be more robust,” Mishra added.
A Bharti Walmart spokesperson declined to comment until an official statement was available.
The ministry of commerce and industry had 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.
A discussion paper issued by the industry department a year ago had suggested that modern retailers with efficient cold storage chains could minimize wastage and ease food inflation. After deliberating on comments from stakeholders, DIPP issued a draft note seeking responses from concerned ministries that was debated by CoS on Friday.
An interministerial group set up by the Prime Minister and headed by chief economic adviser to the finance ministry, Kaushik Basu, had backed FDI in multi-brand retail, holding it will help in moderating the high level of food inflation in India.
However, Planning Commission member Abhijit Sen said the move was unlikely to help India curb the high level of inflation it has seen in recent times. “What FDI can bring in is markets and technology. If the technology is already available, why cannot Indian companies bring it? Can FDI change the present Agriculture Produce Marketing Committee Act (that prevents farmers from selling their produce directly to retailers or the consumer)?” he asked. “If you want to allow FDI in multi-brand retail, you allow it. You do not try to cover up it with all sorts of arguments.”
India currently lets around Rs 1 trillion of fresh produce go waste and more than half of this can be brought to the market if the proper farm-to-fork infrastructure is in place. DIPP had argued that FDI in front-end retailing is imperative to fund a cold chain for farm produce.