FDI in Retail

With the continuing poor economic performance, the government finally came up with a positive step by allowing the FDI in retail and aviation. The move came when the underperforming UPA government realized an increased need to bring in foreign funds to the Indian Territory. FDI in retail was one of the major economic reforms that has been stalled for months by political gridlock. The move came as a part of revival package for the economy which will add to the growth of the economy which is currently growing at pathetic rate of ~5%.

Read on GWI Pros & Cons of FDI in India Retail – Benefits of Foreign Direct Investment.

Key Facts about FDI in Indian Retail

Following are key aspects of the policy:

1) States to Decide on Implementation

It was decided that the Individual states will be given the right to decide on the implementation of FDI rule in their own territory. Thus the fate of some of the world’s largest super markets and retail chain is in the hands of the state government where they want to get it. According to the Congress party, the move will take the sting out of opposition from regional parties, according to whom the policy of FDI in retail will destroy the jobs and will create a further imbalance among the different sections of the society. The first to oppose the move was Mamta Banerjee, the Trinamool Congress Chief and currently the Chief Minister of West Bengal. She is the most powerful ally in Prime Minister Manmohan Singh’s government.

2) Sourcing from Small Companies

According to the current policy guidelines approved by the central government, the foreign retailers who wish to operate in India need to source around 1/3rd of their manufactured and processed goods from industries, with a total plant and machinery investment of less than $1 million i.e., from the small companies having medium to low net worth. Also the policy mentioned about the government’s first right to procure food produce from farmers before companies do. This right was incorporated so as to ensure that the government could easily provide stocks for its food subsidy schemes for poor households.

3) Minimum Investments

A floor on the investment amount is also incorporated by the government. The current floor is set at $100 million, of which it is mandatory to put half of the investment amount for the development of the ‘back-end’ infrastructure which includes facilities such as warehousing and cold storage. These requirements need to be fulfilled in a span of three years of retailer setting up its operations in the Indian Territory.

This policy aims at developing the India’s poor infrastructure which needs a quick revamp so as to unclog the existing bottlenecks in the system. One of the major problems faced by economy is inflation which is expected to reduce with the incoming of the foreign players in the domestic market. According to the apex bank of India the reserve bank, the foreign investment will help the bank cut the policy rates which can be only done when the inflation moderates to the acceptable level from the current level of 8%.

4) Big Cities

It was also mentioned in the document that the foreign retailers will only be allowed to set up shop in cities having population more that 1 million. In states where such cities having population greater that 1 million is not available, in those circumstances the state government will be responsible to decide whether the foreign retailers will set their outlets in the states or not.

Retail Industry: For & Against

In response to the FDI policy of the government in retail, people gave mixed reactions.

i) People believing in development and business were in support of the policy

ii) Others including opposition parties and domestic traders, thought this policy to wipe out the existence of country’s small, family-run neighborhood stores and trigger mass unemployment.

iii) Restricting foreign forms only to cities, government hopes the accessibility of supermarkets will be constrained to the swelling middle class family and this move will also protect the livelihoods of shopkeepers in smaller towns and rural areas.

iv) Government also says 10 million new jobs could be added and this policy will help in sourcing cheaper goods globally.

v) For businesses, the big investment from the foreign players will result in opening up of lot of opportunities for suppliers and also will boom India realty.

vi) For economy, the move will boost the sentiments which could help spur investments in the long run.

So at last we can see that the policy has both negative and positive impacts and it is all dependent on the way the people look at it.