Foreign direct investment expands retail trade

By Shardul Thacker, Mulla & Mulla & Craigie Blunt & Caroe

11 September 2007

847

The retail trade sector in India has undergone significant transformation from small, unorganized family-owned retail units to organized retailing pursuant to the influx of international retailers in domestic markets.

Shardul Thacker
Partner
Mulla & Mulla & Craigie Blunt & Caroe

Organized retail trade, predominantly concentrated in urban areas, constitutes approximately 4% of retail trade in India.

The US$350 billion Indian retail trade sector is estimated at US$427 billion over the next three years.

Policy initiatives

To accelerate the inflow of foreign direct investment (FDI), Government of India (GOI) has partially opened up the retail trade sector to foreign entities for establishment of retail trade operations of “Single Brand” products with FDI up to 51% and prior approval of GOI.

[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”3″ ihc_mb_template=”2″ ]

Such liberalization is aimed at supplementing domestic investment in production and marketing, increasing prospects for technological upgrading, augmenting the competitiveness of Indian enterprises internationally and opening up new markets for export.

FDI in Single Brand retail trade is conditional upon compliance with the following criteria:

– Products to be sold are of a single grand only.

– The products are sold under the same brand internationally.

– Single Brand product retailing would cover only products, which are branded during manufacturing.

The phased approach adopted by GOI in permitting FDI in retail trade is largely founded on the apprehension that 100% FDI under the automatic route in the retail trade sector could lead to excessive competition for the traditional retail sector.

Implications of FDI

The labour intensive retail trade industry is the second largest source of employment, apart from agriculture, having the deepest penetration into rural India and constitutes 10% of India’s gross domestic product.

FDI in organized retail trade generates increased employment opportunities in activities ranging from production to packaging, storage, transport and other logistic services, throughout the supply chain.

With the advent of FDI in retail trade, global retail chains offer greater opportunities for farmers and manufacturers by extending corporate and infrastructural support to the production process in terms of warehouse facilities, cold storage and the introduction of more efficient supply chain management processes.

Large retailers are then able to establish direct linkages with farmers, thereby eliminating intermediaries and contributing to the development of processing facilities and export of products in consonance with their global requirements, thus benefiting consumers by way of competitive prices, improved quality and greater variety.

Back door entry

India has already provided a backdoor entry to international retailers in so far as the policy norms of GOI permit foreign retailers to establish their presence in India by entering into franchise agreements with Indian entities, proprietorships or partnerships to engage in franchise business in India.

Thus, while foreign retailers accessed the Indian retail market through the franchise route, the country was hitherto deprived of direct investment in the retail sector through the avenue of FDI.

Partial relaxation of FDI norms in this sector has enabled foreign entities to infuse direct investment in and set up retail trade establishments in India, thereby increasing the country’s FDI reserves.

Conversely, in the absence of implementation of appropriate regulatory mechanisms, such FDI policy initiative of GOI and the entry of multinational retailers may result in adverse competition and lead to displacement of unorganized domestic retailers, inducement of unfair trade practices and creation of monopolies or cartels.

Recent developments

GOI is considering the possibility of establishing a regulatory authority under the purview of the Ministry of Commerce and Industry or Department of Consumer Affairs for monitoring the retail trade sector and investigating complaints of monopolistic practices, predatory behaviour and abuse of dominance, to achieve a level playing field for domestic retailers vis-à-vis international retail conglomerates.

With market liberalization, emerging affluence of the middle class and a corresponding increased purchasing power and consumer expectations, FDI in the retail sector will integrate the economy with regional and global economies and accelerate the pace of development of the organized retail industry.

[/ihc-hide-content]

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe.