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Government defends FDI in retail trade news
25 November 2011

The government today defended its decision to further liberalise retail trade saying it would in turn help in generating around 10 million jobs over the next three years while also attracting several big-ticket investments in farm sector infrastructure, including cold chains and food processing industries.

The centre will issue a press note next week to lay down the guidelines of the policy on FDI in single-brand and multi-brand retail.

The rationale for leveraging foreign investment in supply chain infrastructure:

  • Lack of investment in the logistics of retail chain tends to create inefficiencies in the food supply chain;
  • India, the second largest producer of fruits and vegetables (about 200 million tones a year), has a very limited integrated cold-chain infrastructure, with only 5,386 stand-alone cold storages, having a total capacity of 23.6 million tonnes, 80 per cent of which is used only for potatoes.
  • 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.  Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be worth over Rs100,000 crore per annum, 57 per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions.
  • As per some industry estimates, 35-40 per cent of fruits and vegetables and nearly 10 per cent of food grains in India are wasted. Though FDI is permitted in cold-chain to the extent of 100 per cent, through the automatic route, in the absence of FDI in front-end retail, investment flows into this sector have been insignificant.

The consequences of inadequate infrastructure are:

  • Indian farmer realises only 1/3rd of the total price paid by the final consumer as against 2/3rd with higher degree of retail. The average price a farmer receives for horticulture produce is barely 12 to 15 per cent of what is paid at the retail outlet, according to a 2007 World Bank study.
  • An 11th Plan working group has estimated a total investment of Rs64,312 crore in agricultural infrastructure. A storage capacity gap of 35 million tonnes has been assessed, requiring an estimated investment of Rs7,687 crore during the 11th Plan.

Bringing supply chain efficiencies

  • Foreign retail majors who have gained decades of experience, technologies and management practices will ensure supply chain efficiencies.

Medium-term impact on regulating food inflation

  • The opening up of multi brand retail will also have a salutary impact on food inflation as it would contribute to savings to the food, which otherwise perishes on account of inadequate infrastructure.

Securing remunerative prices for the farmers

  • In the present dispensation, there is a complex chain of procurement involving several middlemen. FDI in retail will create the enabling environment and it is expected that progressive states will undertake gradual reform of APMC Act, which will ensure direct procurement, at least of horticultural produce from farmers to enable them secure remunerative price.  

Employment opportunities

  • Huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistic management and the front-end retail business.
  • Industry estimates suggest employment of one person per 350-400 sq ft of retail space, about 1.5 million jobs will be created in the front-end alone in the next 5 years. Assuming that 10 per cent extra people are required for the back-end, the direct employment generated by the organised retail sector in India over the coming five years will be close to 1.7 million jobs. Indirect employment generated on the supply chain to feed this retail business will add millions of jobs.      

The government has cited examples of countries like China, Thailand, Russia and Indonesia where FDI in retail trade has brought immense gains to these economies.

China first permitted 49 per cent FDI in retail trade in 1992 and progressively lifted it to no restrictions now. Over 600 hypermarkets opened in China between 1996 and 2001 while the number of small outlets increased from 1.9 million to over 2.5 million.

Employment in the retail and wholesale sectors increased from 28 million people to 54 million people between 1992 and 2001.

Thailand, referred to as country where FDI had an adverse effect on the local retailers, allows 100 per cent FDI in retail trade. Has a limited capital requirement for retail and wholesale outlets. Retail FDI has helped agro processing industry to grow.

Russia's supermarket revolution took place in 2000s with 100 per cent FDI and registered big growth since then.

In Indonesia, where modern retail started in 1990s, no limits are prescribed on number of outlets. Currently local chain  Matahari is the leader

Brazil, Argentina, Singapore and Chile allow 100 per cent FDI in retail sector while Malaysia permits FDI to a certain limit.

India will permit FDI in MBRT in all products, in a calibrated manner, subject to the following conditions:

  • FDI in multi brand retail trade may be permitted up to 51 per cent, with government approval;
  • Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.
  • Minimum amount to be brought in as FDI by the foreign investor would be $100 million.
  • At least 50 per cent of total FDI brought in should be invested in 'backend infrastructure', where 'back-end infrastructure' will include capital expenditure on all activities, excluding that on front-end units - back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.
  • At least 30 per cent of the procurement of manufactured/ processed products should be sourced from 'small industries', which have a total investment in plant and machinery not exceeding $1 million. (This refers to the value at the time of installation, without providing for depreciation.) Further, if at any point in time, this valuation is exceeded, the industry will not qualify as a 'small industry' for this purpose.
  • Self-certification by the company to ensure compliance of the condition as above, which could be cross-checked as and when required. Accordingly, the investors have to maintain accounts, duly certified by statutory auditors.
  • Retail sales locations may be set up only in cities with a population of more than 1 million and as per 2011 census only 53 cities qualify for FDI in multi-brand retail out of nearly 8,000 towns and cities;
  • Government will have the first right to procurement of agricultural products;

Rationale for allowing 100 per cent FDI in single brand retail trading

In the last 5 years, under the current regime of 51 per cent FDI in single brand retail, foreign direct investment of only $44.45 million have been received, constituting barely 0.03 per cent of total FDI inflows. Globally, single brand retail follow a business model of 100 per cent ownership and global majors have been reluctant to establish their presence in a restrictive policy environment. The current cap of 51 per cent confers a right to pass all ordinary resolutions, while enhancing cap to 100 per cent will confer full ownership and control.

Single brands permitted 100 per cent FDI, subject to the following conditions:

  • FDI in single brand retail trading may be permitted up to 100 per cent with government approval;
  • Products to be sold should be of a 'single brand' only;
  • Products should be sold under the same brand internationally, ie, products should be sold under the same brand in one or more countries other than India;
  • Single brand' product-retailing would cover only products, which are branded during manufacturing;
  • The foreign investor should be the owner of the brand;
  • In respect of proposals involving FDI beyond 51 per cent, 30 per cent sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen. 'Small industries' would be defined as industries, which have a total investment in plant and machinery not exceeding $1 million.Condition of 30 per cent sourcing from small-scale sector can be done from anywhere in the world and is not India specific. However, in this case, it has been stipulated that 30 per cent sourcing will be done from micro and small enterprises having plant and capital machinery worth $1 million:
  • This condition will ensure that our SME sector, including artisans, craftsman, handicraft and cottage industry benefits, especially in sectors like textiles, gems and jewellery, leather and jute. This condition is applicable both for multi-brand retail in all cases and for single brand retail in cases where foreign equity exceeds 51 per cent.

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Government defends FDI in retail trade