FOREIGN DIRECT INVESTMENT IN RETAIL SECTORS (51% FDI ON MULTI- BRAND RETAIL) A REFORM OR ROADBLOCK? BRIEF BACK GROUND & INTRODUCTION FDI in Multi-Brand retailing is prohibited in India. FDI in Single-Brand Retailing  is, however, permitted since 2006, to the extent of 51%. Since then, a total of 94 proposals have been received by FIPB till May, 2010. Of this, 57 proposals were approved them. An FDI inflow of US $ 194.69 million (Rs. 901.64 crore) was received between April, 2006 and March, 2010, comprising 0.21% of the total FDI inflows during the period, under the category of single brand retailing. The proposals received and approved related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, life-style products etc., covering high-end items. Single brand retail outlets with FDI generally pertain to high-end products and cater to the needs of a brand conscious segment of the population, mainly attracting a brand loyal clientele, which often has a pre-set positive disposition towards the specific brand. This segment of customers is distinctly different from one that is catered by the small retailers/ kirana shops. A discussion paper has been put up on July 31, 2010 by the Department of Industrial Policy and Promotion (DIPP) of the Union Commerce and Industry Ministry in context with allowing the FDI in retail for generating debate. Since then the Government has been pushing for opening the sector for FDI in the backdrop of increasing food inflation. Inter Ministerial group, under the chairmanship of Chief Economic Adviser Shri. Kaushik Basu, had moved a draft proposal for opening the sector for FDI, arguing FDI in organized retailing would help in controlling food prices. Within the government, the Planning Commission and Ministry of Agriculture are ready for 51% FDI in Multi-Brand Retail sector. However, Ministry of Micro, Small and Medium enterprises has recommended that Government to limit FDI in sector to 18%. Thus FDI in retail has been a very sensitive political issue in India. RATIONALE FOR FDI IN RETAIL TRADING: The Agriculture sector needs well-functioning markets to drive growth, employment and economic prosperity in rural areas of the country.Further, in order to provide dynamism and efficiency in the marketing system, large investments are required for the development of post-harvest and cold-chain infrastructure nearer to the farmers’ field. FDI in front end retailing is imperative to fund this investment. Allowing FDI in front end retail operations will enable organized retailers to generate sufficient cash to fund this investment. Investment in organized retail by domestic players will be ineffectively deployed if FDI is delayed.  FDI in front-end retailing is imperative to derive full advantage of the value chain for the producer and the consumer.  International retailers will bring with them technology and management know-how that will finally impact our whole retail sector through the adoption of best practices. There is a need to ensure that issues of cost and quality, relating to consumers, are adequately addressed. This could be achieved through stabilizing prices and reducing inflation, which, in turn, could be achieved through direct buying from farmers, improving supply chain inefficiencies to lower transit losses, improved storage capabilities to control supply/demand imbalances, better quality and safety standards through farmer development and increased processing of produce. Similarly, there is a need to address issues relating to farmers, through removal of structural inefficiencies. This could be achieved through liberalized markets, with direct marketing and contract farming programmes, from which farmers could profit, as also more predictable farm-gate prices, steadier incomes and better access to evolving consumer preferences through private investors, especially the organized retail sector. FDI in retail, may, therefore, be an efficient means of addressing the concerns of farmers and consumers, as referred to above. The private sector, especially organized retail, is best suited to make investments of this magnitude. Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. Opening FDI in retail could also assist in bringing in technical know-how to set up efficient supply chains which can act as models of development. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices /inflation. IMPORTANCE OF RETAIL SECTOR IN INDIA 1.      Retail sector is one of the largest contributors to Indian GDP. It provides 15% of employment through world’s largest retail network with 12 million outlets which makes it second largest employment provider in India after agriculture. 2.      The organized retail sector is growing at a rapid pace of 28% p.a. Hence India is sometimes referred to as “Nation of shopkeepers”. CURRENT FDI INVESTMENT CAP AND CONDITIONS     Government has permitted FDI in single brand retail upto 51% in joint venture for the retail of branded products. Brands like Adidas, Nokia; Amway, Samsung, Sony etc are the examples of single brand products which are an outcome of FDI.     Though 100 % FDI is permitted in cold chain through the automatic route in the absence of FDI in retail, the flow of such funds to the sector has been insignificant. The present FDI regime allows 51 per cent foreign investment in single brand retail and 100 per cent in wholesale cash and carry. The Ministry of Consumer Affairs and Public Distribution initially suggested a cap of 49 % FDI in multi-brand retail, while the Micro, Small and Medium Enterprises Ministry’s recommendation is for 18 per cent FDI. But the recent skyrocketing of food prices — especially those of onions — and the declining inflow of FDI have opened a door for the Government to take a more ambitious decision on the prickly issue.     But it has its meaning confined to single brand because multi brand retail sector is one of the few sectors where FDI is not allowed. It is because there have been protests by trading associations and other stakeholders against allowing FDI in multi brand retail.     A crucial argument against allowing foreign investment in retail is the belief that small retailers will suffer because of penetration of foreign players in the market. But government is showing some positive signs and planning to allow upto 51% in multi brand retail sector. It has already issued a concept paper in this regard. RETAIL SECTOR AS AN EMERGING MARKET FOR FDI After Liberalization, Privatization and Globalization (LPG), India has radically emerged in retail sector. The rapid growing GDP rate, strategic location and geography, versatile demographics have attracted foreign investors and India has been portrayed as an important investment destination for global players. According to A.T Kearney, a well known international management consultant- “India is second most attractive retail destination globally amongst 30 emergent markets”. Even world renowned retailing organizations like Wal Mart has decided to enter India via joint venture with Bharti and a French retailer Carrefour is also planning to enter into supermarket retail through Dubai based Landmark group. POLICY FOR FDI IN RETAIL TRADING IN OTHER COUNTRIES FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation, while Malaysia has equity caps on FDI in the retail sector. ARGUMENTS IN FAVOUR OF FDI     FDI will bring the latest technology and management practices to build modern supply chains in India connecting small producers with national and even global markets.     Modernization of the creaky old distribution system.     Better customer services, lower prices and product quality because of competition between domestic and international players in retail market.     Breakdown of domestic monopoly and capital constraints. ARGUMENTS AGAINST FDI     Present retail scenario in India will not be able to survive competition from global markets. It is because lending rates in India are quite high and hence high cost of borrowing will force domestic players to charge higher prices.     FDI can upset import balance.     Domestic retail players have a threat of being unemployed.     FDI in retail India is a lost cause. The lure of FDI in retail is based on the Wal-Mart story in China. That was when China had become the hub for exporting cheap goods into the U.S. Many U.S. corporations exploited the opportunity. That story has outlived its purpose. The Yuan debate has undone it. The U.S. cannot afford to live with a hollowed manufacturing base; nor can China live with an exports-only strategy and has to turn inward. The moral is that there is no global model of retail which can be replicated elsewhere.     Arguments in favor of FDI in retail are fallacious. India is not an economy which is suited to the kind of outsourcing and creation of supply chain which can feed large retail chains. The single brand retail which was allowed with fanfare has not taken off. It has merely created a window for import of finished products from richer countries.     Lastly, Indian retail supports more than 30 million people. These have taken to retail as the government has failed to create employment opportunities for them. It is disguised unemployment. These millions will rise against FDI in retail ADVANTAGES: In spite of many negative arguments, FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.  It can bring about: ·              Supply Chain Improvement ·         Investment in Technology ·         Manpower and Skill development ·         Tourism Development ·         Greater Sourcing From India ·         Upgradation in Agriculture ·         Efficient Small and Medium Scale Industries ·         Growth in market size ·         Greater Productivity ·         Benefits to government: through greater GDP, tax income and employment generation GOVERNMENT’S MOTIVE BEHIND THE DISCUSSION PAPER The government’s putting up a discussion paper in FDI is seen as a way to ease the massive supply bottlenecks which have contributed to the high inflation. This step is politically sensitive, but the government is careful as it suggests a specific investment cap. ISSUES TO BE RESOLVED The discussion paper needs the following issues to be resolved. a)      Should FDI in multi brand retail be permitted? If so, should a cap on investment be imposed? If so, what should this cap be? b)      Should FDI be leveraged for creating back-end infrastructure to develop the retail trade in food grains, other essential commodities and multi-brand retail in general? c)      Should a minimum threshold limit for investment in backend infrastructure logistics be fixed? d)      Should there be any reservations for Rural Youth? e)      Should there be a minimum percentage fixed for manufactured products  sourced from the SME sector in India? f)       How best can small retailers be integrated into the upgraded value chain? g)      Should foreign investment for such stores be initially allowed only in cities with population of more than 10 lakhs (2001 census)? As there may be difficulties faced with regard to availability of real-estate in such cities for setting up such ventures, should an area of 10 kms around the municipal/urban agglomeration limits of such cities be included within the definition of the city? RECENT DEVELOPMENTS : The Committee of Secretaries (CoS) on 23rd July, 2011 has recommended for opening, politically sensitive multi-brand retail sector for Foreign Direct Investment (FDI) and has suggested FDI up to 51% in multi brand retail sector. However, this permission is with the following conditions:- a.   the minimum investment should be $ 100 Million. b. not less than the 50% of the investment have to be dedicated for development of back end infrastructure such as warehousing and cold storage. The CoS had also suggested that the FDI in multi brand retailing should be allowed only in 36 cities which have population of over 1 million. Though above conditions have been framed to increase the proposal’s successfulness, no one is quite sure how all these riders will be enforced and how will the global retail players react to these conditions. Are they practical? Who will monitor them on the ground level?  - Needs to be analyzed. There is yet any  consensus on the riders – Whether it be the minimum investment, what is the percentage of investment that needs to be reserved for backend operations, what percentage of goods should be procured from SMES. NEXT MOVE : However, before becoming it a policy, it has to get approval from cabinet, and then for the final decision it will be placed in parliament, where this recommendation is expected to face stiff opposition from political parties from UPA and opposition. Political parties within UPA government and opposition has been against of opening the sector for FDI, due to fear of huge job loss of small shopkeepers from unorganized sector. CONCLUSION : The recommendation of CoS has virtually opened the doors for global multi-retailing giants like WalMart and Carrefour, which have been lobbying hard, pressuring government for opening the India's retail sector. Currently, 100% FDI is allowed in Cash and Carry wholesale trade that is business to business, and 51% in single brand retail. Government had not allowed FDI in multi brand retail till yet. However, the revised FDI policy has kept at bay significantly expected changes such as permitting FDI in Limited Liability Partnership, Multi-Brand Retail Trading and several other subjects on which draft discussion papers were released earlier for public comments. It is important that these areas are also taken up the Government for liberalisation towards making India one of the most favourable FDI destinations in the world. Keeping in view the large requirement of funds for back-end infrastructure, there is a case for opening up of the retail sector to foreign investment. At the same time, in the Indian context, there is a view that this may be more appropriately done in a calibrated manner. We must ensure that the FDI does make a real contribution to address the inadequacies of back-end infrastructure. Alongside, we need to address the challenge of integrating the small retailer in the value chain. Many Industry and experts have welcomed the recommendations of CoS, and expect that the opening of retail sector would attract more FDI in country and will help to grow the Indian retail sector which has been historically dominated by unorganized sector. The potential road block is that the States would have to support proposal, drive implementation and left parties, traders, farmer groups are planning counter moves and riders to FDI may be tough to implement and may drive away some global majors; fearing political fallout.  The opposition party of the country is also opposing the move on fears that it would adversely impact small traders and kirana stores.  In effort to stall the FDI on retail traders and trade unions are preparing themselves to stage demonstration and even small traders understood the implication. Unless some mechanism to protect the interest of farmers/Small Traders/Kirana Stores are framed and their interest is protected it is only a roadblock rather than a reform. The situation is to be wait and watched. ********