New Delhi: Wary of the potential electoral fallout of breaching its promise not to permit foreign direct investment (FDI) in multi-brand retail, the National Democratic Alliance (NDA) government has decided not to allow foreign supermarket chains to sell non-food items during its current tenure, which ends in 2019.
“Allowing foreign retailers to sell non-food items in India is unlikely to happen before the next general election," a senior government official involved in the FDI decision-making process said on condition of anonymity.
The Union cabinet in June 2016 allowed 100% FDI in trading, including through e-commerce, of food products manufactured or produced in India.
The food processing ministry wants foreign supermarkets to be allowed to sell non-food items up to 25% of total sales. 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.
Global supermarket chains such as Wal-Mart Stores Inc., Tesco Plc and Metro Cash and Carry have been keen on such a change and had conveyed their views to the central government.
“Such retail chains may not enter India for now as they don’t want to change their global business model," said the official cited earlier.
Even so, there are already enough takers for the government’s offer of 100% FDI in food retail. In July, online retail giant Amazon.com Inc. got government approval to invest about $500 million to build a food retail business in India, followed by approvals for online grocery service providers Grofers and BigBasket.
A food industry executive who didn’t want to be named said the government can allow FDI in non-food retail even now without any political implications. “This can act as an engine of growth and create jobs. It has to be communicated to the electorate properly," he said.
The only way of making 100% FDI in food retail intrinsically viable is by allowing foreign retailers to sell non-food items as well, said Mohit Bahl, partner at KPMG in India.
“Why will a consumer go to a shop if he can only buy food items but not other household items? It doesn’t make sense even for the consumer," he added.
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%, according to 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 said.