The FDI discussion paper by DIPP 2010 – a summary

In the following, FII is providing a summary of the discussion paper by DIPP about the “Issue of Discussion Paper on Foreign Direct Investment (FDI) in Multi-Brand Retail Trading” with the most important points.

TKirana-Marketshe discussion paper starts with the present scenario, according to which Multi-Brand retailing is prohibited in India, but FDI in Single-Brand Retailing is permitted since 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till May, 2010. Of this, 57 proposals were approved. An FDI inflow of US $ 194.69 million (Rs. 901.64 crore) was received between April, 2006 and March, 2010, comprising 0.21% of the total FDI inflows during the period, under the category of single brand retailing.

FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the Government approval route, in 1997. It was brought under the automatic route in 2006, the paper reports.

A number of CONCERNS have been expressed with regard to opening of the retail sector for FDI. The first is that the retail sector in India is the second largest employer after agriculture. As per the latest NSSO 64th Round, in 2007-08 retail trade employed 7.2% of total workers and provided job opportunities to 33.1 million persons. A second would be that FDI would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there. A third argument listed by the discussion paper is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector would be allowed to grow and consolidate first, before opening this sector to foreign investors.

From the retail front, the discussion paper comes to the backend and argues that there would be “limitations of the present setup”, as there has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure. The chain would be highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. STORAGE INFRASTRUCTURE is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular.

Then, the paper come to an important aspect: though FDI is permitted in cold-chain to the extent of 100% (automatic route), but – in the absence of FDI in retailing – FDI flow to the sector has not been significant. But this investment in agriculture infrastructure is needed. “It is estimated that India will need substantial investment to develop infrastructure for supporting retail development. A significant portion of this will need to be earmarked for up gradation of the supply chain for fruits & vegetables. A major portion of his investment is expected to come from the private sector, for which an appropriate regulatory and policy environment is necessary”.

In another chapter, the discussion paper summarizes the views of earlier studies on FDI in retail, like from FICCI, ICRIER, the Economic Survey, and others. Most argue for opening up of FDI in retail, but not all and some would open up only with certain conditions. Some recommendations, among many others, about FDI and other important measures, are for example the following: “FDI be allowed in retail trade as it would speed up the growth of organized retail formats; Gradual opening of the retail sector over a period of 3-5 years to give domestic industry enough time to adjust to the changes”; Or “Encouraging co-operatives and associations of unorganized retailers for direct procurement from suppliers and farmers”.

The paper looks also for the policy for FDI in other comparable countries, like China, Russia, Thailand, or Chile. In the Chile case, for example, foreign retailers have entered the country after FDI had been allowed, but have been bought later by Chilean retail chains, which are now on expansion course in the whole of Latin America.

Based on all the foregoing, the discussion paper formulates its rationale why FDI in retail in India should be permitted. First, the Agriculture sector would need 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 would enable organized retailers to generate sufficient cash to fund this investment. Investment in organized retail by domestic players would 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.

The other arguments are more or less independent from FDI and focus on issues of cost and quality, which could be achieved through stabilizing prices and reducing inflation, which, in turn, could be achieved through direct buying from farmers, etc. The paper discusses also a removal of structural inefficiencies, to be achieved through liberalized markets, with direct marketing and contract farming programs, etc.

The paper expresses that is would be clear that “organized retail cannot have a cake walk and will face a growing challenge from the unorganized retail sector”. It would be also evident that without addressing the gaps in the value chain, organized retail will neither be profitable nor make any great difference to the economy.

“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”.

At the end, based on the analysis and recommendation before, the discussion paper lists a whole bunch of quite sophisticated and clever questions regarding the entry of FDI. For these, please see the other article.


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