The department has received more than a hundred responses on the discussion paper from individuals, firms and industrial organisations both in favour of and against opening up the sector.
There are a few basic questions that are posed in the discussion paper: Should a cap on investment be imposed? If so, what should this cap be?
About 50 per cent of all responses received on the issue supported opening up the sector. Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (SCAI, a 44 member association of Indian multi-brand retailers and shopping malls) support a phased approach toward liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.
The international retail players such as Walmart, Carrefour, Metro, IKEA, and TESCO share the same view and insist on a clear path towards 100 per cent opening up in near future. Large multinational retailers such as US-based Walmart, Germany’s Metro AG and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-carry ventures in India, have been demanding liberalisation of FDI rules on multi-brand retail for some time.
A second question in the discussion paper is whether it should be stipulated that a percentage of the incoming FDI should be spent on back end infrastructure, logistics or agro processing? Most of the responders suggest no such stipulations should be provided. They argue retailers would develop infrastructure independently depending on business requirements. The commerce minister recently pointed out that there will be mechanisms in place to encourage back-end investments.
The third important question in the discussion paper is about stipulating a minimum percentage of manufactured products to be sourced from the small and medium enterprise (SME) sector in India. The majority of responses argue that allowing FDI will naturally develop a robust supply chain with better integration of farmers and small and medium enterprises. This will result in knowledge and skills transfer, and will provide a more transparent mechanism for pricing and supply planning.
Despite these arguments, a number of apprehensions have been expressed regarding liberalisation of FDI in the retail sector. A prime concern is that it would lead to unfair competition and ultimately result in large-scale exit of domestic small family managed retail outlets.
Regional leftist parties, trade unions, industry and sector specific organisations and other interest groups such as the Confederation of all India Traders have put up stiff resistance to liberalisation.
They strongly object to permitting FDI in retail trade in any form on the grounds that it will endanger the livelihood of 40 million people directly engaged in retail trade and 200 million people depending on them in India. They contend that farmers and small manufacturers will be forced to sell their products at cheaper prices dictated by the predatory pricing policies of multinational companies. There is no substantive evidence to support this argument.
There are also divided opinions among government departments on the efficacy of opening up to FDI in multi-brand retail. The paper found support in key wings of the government like the finance ministry, the department of consumer affairs, the PMO, agriculture ministry and the Planning Commission.
Two government departments have objected to the potential reform. The micro, small and medium enterprises (MSME) ministry has argued that the government should not allow more than 18 per cent FDI in multi-brand retail while the Communications & IT Ministry has said that opening up of the sector would have an adverse impact on manufacturers of electronics.
The consumer affairs ministry has said in a note to DIPP that FDI up to 49 per cent in multi-brand retail would be welcome, but it should be mandatory that this is through the infusion of fresh capital, 75 per cent of which would be spent on back-end infrastructure.
There has been a lack of investment in infrastructure, an inadequate supply chain system, and wastage of precious agricultural produces in the Indian retail sector. There is a general view that foreign direct investment in retail would create a visible and positive impact, particularly on the way agriculture produce is procured, stored, conserved and marketed. It is hoped this would minimise the annual R100 billion wastage of agricultural produce.
A 2005 ICRIER study suggested a gradual opening of the retail sector, allowing FDI up to 49 per cent over a period of 3-5 years would enable domestic industry enter into joint ventures, and have access to investment, technological know-how and best management practices. A 2008 ICRIER study found no evidence of an adverse impact on intermediaries from organised retail, and farmers were found to benefit significantly from the option of direct sales to organised retailers.
There is an urgent need to encourage financial and private equity investment in retail to ensure adequate, and productive, capital flow into the country. 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 organised retail, is best suited to make investments of this magnitude.
Presently a six-member inter-ministerial committee is evaluating stakeholder feedback received on the discussion paper. It has been suggested that this process will yield a single recommendation, possibly an initial 26 per cent cap. It will then be up to the committee to build consensus around this outcome.
Liberalisation of the sector appears to be on the way, but just how much is still an open question.
Nabeel A. Mancheri is a Postdoctoral Associate with the National Institute of Advanced Studies, Bangalore.