Wednesday, July 7, 2010

FDI in Multi-brand Retailing

The Government has reopened the debate on allowing foreign investment in the multi-brand retail sector. A discussion paper issued yesterday reviews existing studies conducted by the Government and other entities on this topic and also examines the experience in other emerging markets.

The rationale for FDI in the retail sector is set out as follows:
6.1 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. International retailers should be mandated to bring with them technology and management know-how which will ensure that investment in organized retail works to India's advantage. In order to provide dynamism and efficiency in the marketing system, large investments are required for organized retailing, linked with the back end of the value chain. 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.

6.4 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 knowhow 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.

6.7 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.
Rather than make any specific proposals or recommendations, the Government has set out a list of 12 questions for inviting public views and comments, which are due by July 31, 2010.

Given the tenor of the discussion paper and the questions, it appears that while there is merit in opening up the retail sector to FDI, the liberalization will occur in a progressive manner and will come (at least initially) with a number of conditions.

From the perspective of the ease of doing business, any reform would have to streamline the process of investment. For instance, a comprehensive regime that deals with FDI in trading may be more preferable compared to the existing structure that differentiates between various types of trading such as wholesale trading, cash and carry wholesale, single-brand retailing and multi-brand retailing (that may not only be complex from a regulatory standpoint but also expose the system to the risk of regulatory arbitrage depending on the conditions associated with each route).

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