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Sunday, July 31, 2011

BUSINESS: FDI IN RETAIL Neon Sign Blinking India moves one step closer to FDI in retail, but questions still remain LOLA NAYAR

Stop shop Customers at a Walmart store in Amritsar
Neon Sign Blinking
India moves one step closer to FDI in retail, but questions still remain

It was an atypical 'business as usual' moment for the beleaguered government, savaged by discontent over a series of scams and numbing inflation. The green light from the committee of secretaries (CoS) earlier this month takes supporters of foreign direct investment (FDI) in multi-brand retail one step closer to a final political nod. The only hitch now, it seems, lies in the final contours, described as a "political face-saver" by official sources.

A parsing of the latest proposal, which has been accessed by Outlook, provides some sense of the final outcome. The recommendation for a 51 per cent cap in multi-brand retail is along the lines of the FDI allowed in single-brand retail in 2006. Some of the other conditions like a minimum investment of $100 million with 50 per cent going into back-end operations, 30 per cent of sales to small retailers and 30 per cent of procurement from domestic small and medium enterprises (SMES) are a compromise of views put by various ministries headed by different UPA partners (see graphic).

It's clear that these conditions have been framed to satisfy the politicians and increase the proposal's saleablity. The UPA government has its back to the wall, and needs to be seen to be doing something to ease supply bottlenecks and tame food inflation. As with most policies in the making, no one is quite sure how all the riders will be enforced. How will the big global retail giants react to the conditions? Are they practical? And who will monitor them on the ground?

If the buzz in bureaucratic corridors is any indication, there is considerable haste in pushing the proposal through. This is borne out by the fact that "there is as yet no consensus on the riders—whether it be the minimum investment; what percentage of investment should be reserved for back-end operations; or what percentage of goods should be procured from SMES", a senior-level bureaucrat involved in the deliberations reveals.

Will It Sell: What Everyone Said

On July 22, a government panel took a significant step towards FDI in multi-brand retail. A look at the proposals, important ministries' reactions and the potential roadblocks.

Adding to this cocktail of uncertainty is the crucial role earmarked for the state governments. In some cases, political alignments could play spoilsport. Alleging that the conditions and riders being forwarded are simply a "smokescreen to justify letting global retail companies come in", Nirmala Sitharaman of the BJP states that the UPA government has never made a wholehearted effort to prepare the retail community to outside competition. Indian shopkeepers have, she adds, sustained themselves either through their own savings or through community efforts.

While Sitharaman acknowledges that the BJP's stance is not to "not ever" allow FDI in multi-brand retailing, political considerations could play a role in BJP-ruled states like Karnataka and Gujarat. There's potential for trouble in other states too. The AIADMK's Jayalalitha is lukewarm to the idea. And it's not clear how this will play out in West Bengal or even in UPA-governed states like Kerala.

No wonder the skyline remains hazy for the industry. "As yet, we don't know the riders and conditions.... The 51 per cent (FDI) limit looks good but the industry was happy even with the prospect of 49 per cent," says Kishore Biyani, managing director of Future Group. Emphasising that India is in need of considerable FDI inflow, Biyani sees potential for raising the proposed minimum limit to over $100 million.

Kumar Rajagopalan, CEO, Retailers Association of India, the umbrella body of the retail chains in the organised sector, describes the committee of secretaries' (CoS) nod as "one step ahead" but is unsure whether the remaining steps "will come with too many riders". The insistence on 50 per cent investment into back-end infrastructure may be justifiable in the case of food products but not for merchandise like electronics and garments, he explains. The multi-national biggies waiting in the wings—Walmart, Carrefour among others—are keeping a low profile. Experts feel a 51 per cent stake may be acceptable to potential global investors as it would limit their risk while opening a door for Indian players to cut losses by roping in global expertise.

But where does that leave the small and medium retailers as also the farmers and the micro, small and medium enterprises (MSMES)? Admitting to having concerns over the proposal's impact on millions of small traders, food and consumer affairs minister K.V. Thomas is keen that "the big retailers should not be allowed to become a monopoly" and that "the interests of the large number of small traders should be protected through cheaper credit arrangement".

Upset that their concerns expressed via feedback on the draft proposal have not been heeded by the government, Sudhir Panwar of the Kisan Jagriti Manch stresses, "Unless there is some kind of mechanism to protect the interests of farmers, international experience has shown that the lowest link in the chain always suffers." In a last-ditch effort to stall the FDI decision, umbrella organisations of traders and trade unions are preparing to stage demonstrations and reach out to various political parties and state governments to seek their support. "Small traders have started to understand the implications (of the proposal), so we have a larger number supporting us now," claims Praveen Khandelwal, secretary general, Confederation of All India Traders (CAITt).

Despite the numerous naysayers, the protests have not caught fire thus far. Given the pushing and pulling fromvarious sources, the multi-brand retail juggernaut looks to keep rolling on.

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JUL 30, 2011 02:04 PM

Given the complex relationship Indian corporates have had with foreign collaborators, it may not be a bad idea to create a mechanism by which foreign retailers are able to offer 49% shares to the Indian public.

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