Modi government mulls allowing 100% FDI in retail, with caveats

New Delhi: To promote its flagship Make In India scheme with job creation at its core, the Narendra Modi government is considering allowing 100% foreign direct investment (FDI) in multi-brand retail—as long as the products are made in India.

A government official familiar with the matter, who spoke on condition of anonymity, said the proposal is being considered. “A final decision on the matter will be taken after wider consultation,” he added.

The policy is unlikely to be termed “FDI in multi-brand retail” as the Bharatiya Janata Party (BJP) is opposed to the idea and had promised in its 2014 election manifesto to not allow this.

In 2012, the then Congress-led United Progressive Alliance government allowed 51% FDI in multi-brand retail (supermarkets and the like) in some cities, subject to the approval of state governments. When it came to power in 2014, the BJP-led National Democratic Alliance government put the policy on ice without a formal notification.

The current proposal by the government, if implemented, is expected to be vastly different from the UPA policy as it will not allow imported items to be sold by multinational supermarket chains such as Wal-Mart Stores Inc. However, it is likely to do away with city-specific and sourcing restrictions put by the UPA government. The UPA had restricted such supermarkets to cities with population in excess of 1 million and mandated that they source 30% of their products from small and medium enterprises.

An executive at a large retail chain, who asked that neither he nor his firm be identified, said the policy being considered would make sense for foreign supermarket chains, though local supermarkets would still have an advantage in terms of providing more choice to consumers as they are allowed to sell imported items as well.

The proposal may also help Prime Minister Narendra Modi meet his target of doubling income of farmers by 2022.

In parallel, the government is considering allowing foreign food retailers to sell 25% non-food items of the total items sold to enable 100% FDI in food retail chains. Foreign supermarket chains have pointed out that opening food retail chains does not make sense as the profit margin in such businesses is thin, and the food processing ministry which is spearheading the proposal has recommended allowing some non-food items to be sold in such stores to make the model viable.

Akash Gupt, partner at PwC India, said the proposal to link foreign investment in retail to local manufacturing and sourcing makes sense as it will create manufacturing capacity in the country. “Multinational hypermarkets may be interested in opening stores in India under the model since they don’t rely a lot on imports and mostly depend on local supplies,” he added.

In April, commerce minister Nirmala Sitharaman informed Parliament that the government is not rethinking its opposition to FDI in multi-brand retail. In July, the cabinet allowed all companies, including Indian supermarkets, to tap the equity market to raise foreign portfolio investment up to 49% without seeking the finance ministry’s approval.

By 2020, India’s retail sector is expected to double to $1.1-1.2 trillion from $630 billion in 2015 at a compound annual growth rate of 12%, said a report released by lobby group Federation of Indian Chambers of Commerce and Industry and PwC in September last year.

Backed by robust economic growth and rising household incomes, consumer spending in India is also expected to touch $3.6 trillion (about Rs230 trillion) by 2020, increasing India’s share in global consumption to 5.8%, more than twice its current levels, the report added.