The Indian government on Friday approved 51 % foreign direct investment in multi brand retail, paving way for the entry of multinational giants like Walmart and Amazon into one of the largest consumer markets in the world. The cabinet committee on economic affairs cleared the long pending proposal to allow foreign companies to start selling in India directly, according to reports.
FDI in multi-brand retail has many pre-conditions, though. The minimum FDI limit has been set at $100 million. Half of any investment has to made in infrastructure like cold-storage chains and warehouses. This is designed to help the agricultural sector and India has a severe shortage of these.
The most problematic condition, from the point of view of investors, wil be that at least 30 per cent of the good to be sold will have to sourced from local producers. [reports].
Earlier, the government had allowed 100 % foreign direct investment in single brand retail and also proposed to open up the $ 450 bn Indian retail market to multi national companies. However, due to fierce opposition from allies, the ruling United Progressive Alliance (UPA) had to put the proposal in the back burner.
The central government has however passed the buck to state governments, leaving the option on the states to invite multi-brand retails.
The Chief Ministers of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and Governments of the State of Manipur and the Union Territory of Daman & Diu and Dadra and Nagar Haveli, have expressed support for the policy in writing. The Chief Minister of Jammu & Kashmir, through his press statements, has publicly endorsed the policy and asked for its implementation. The State Governments of Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have expressed reservations. [source]
Effect on E-commerce?
For the nascent e-commerce industry in India, this is of course good and bad news. This will mean that companies like Amazon can enter the country on their own. Amazon has been strengthening its India operations of late and is planning to acquire an Indian company. Walmart, the world’s largest retailer is also poised to enter the market. Will VC money for e-commerce ventures get easier? Or will they wait and watch for big companies to make their move?
Recommended Read: Tera kya hoga ‘kirana’? A Perspective on Multi-Brand Retail FDI
The nuts and bolts
- Center has put the ball in the state government’s court. Retail sales outlets can be set up in States which have agreed or agree in future to allow FDI in multi brand retail.
- Outlets can be setup only in cities with more tan 10 lakh population and within city limits.
- At least 50% of total foreign investment must be invested in`backend infrastructure` within three years of the induction of FDI.
- A high-level group under the Minister of Consumer Affairs will be constituted to examine issues concerning internal trade and make recommendations for internal trade reforms.
- Back-end infrastructure which includes manufacturing, processing, distributtion, design improvement, quality control, packaging, logistics, storage, ware-house must be set up within three years
- At least 30 % of the goods sold must be procured from Indian small industries