INDIA: FDI retail reform returns but states will have final say

By Dean Best | 14 September 2012

Indias government believes reform will benefit "entire" supply chain

India's government believes reform will benefit "entire" supply chain

The Indian government has again opened the door to foreign investment in the country's retail sector - but states will have the final say on whether multi-brand outlets backed by overseas capital can open.

Nine months after India's government had to suspend efforts to allow foreign firms to own 51% of multi-brand stores amid political and some retail opposition, it today (14 September) again launched reforms to ease restrictions on investment.

Last December, the Indian government put the reforms on hold in a bid to form what Finance Minister Pranab Mukherjee then described as a "consensus through consultation among various stakeholders".

After discussions with state governments, farmer representatives, the food processing sector and the retail industry, New Delhi has outlined its fresh plans for reform. However, the guidelines give states the power to block the opening of multi-brand stores backed by foreign capital.

In its announcement, India's government said "trade and commerce" within a state is a subject for local government adding: "As such, the [FDI] policy provides that it would be the prerogative of the state governments to decide whether and where a multi-brand retailer, with FDI, is permitted to establish its sales outlets within the state. Therefore, implementation of the policy is not a mandatory requirement for all states."

Other conditions in the revised reforms state outlets must only set up in cities with a population of over 1m. States that do not have cities of that size can choose to allow foreign-backed stores to open in smaller locations.

At least 50% of the value of the foreign investment must be invested in "back-end infrastructure" within three years.

The Indian government said its discussions with stakeholders had "generally indicated support" for reform "subject to the introduction of adequate safeguards".

Foreign retailers, including Wal-Mart Stores and Tesco, are present in India, operating in wholesale ventures with local players. However, allowing overseas companies to invest in multi-brand outlets has been proved controversial with opponents arguing it will hit the livelihoods of small, domestic retailers.

In its announcement, the Indian government said small traders already "co-exists" with organised retailers. It argued traders had improved their business practices and modernised their stores in response.

"Global experience also indicates that organized and unorganized retail co-exist and grow," the government said.

It also argued farmers would benefit from a reduction in the amount of crops lost and small processors would gain from a requirement insisting at least 30% of goods must come from Indian manufacturers.

Consumers, however, would "benefit the most", it added: "Firstly, from the lowering of prices that would result from supply chain efficiencies and secondly, through improvement in product quality, which would come about as a combined result of technological upgradation; efficient grading, sorting and packaging; testing and quality control and product standardisation."

Sectors: Emerging markets, Retail

Companies: Wal-Mart Stores, Tesco

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