With the green light being signalled to cut the red tape surrounding India’s retail sector, the country is all set to become one of the most attractive destinations for foreign direct investment (FDI), and thereby carve itself a rather large slice of the global $450 billion industry. The recently approved Companies Bill 2011 will replace a 55-year-old legislation that has been limiting the amount of foreign investment in India. This means, international retailers will soon be entitled to 100% FDI, in single-brand retail, and upto 51% in multi-brand retail with a few riders.
While a few sceptics believe that the decision comes as the final nail in the coffin for unemployment, when all the ‘middle men’ are cut out, or that innocent farmers will be at the mercy of large chain corporates, who will begin to dictate price; one thing is for sure – the unfolding retail revolution will be an immediate blessing for consumers, gradually offer a vital role to local retailers and finally contribute towards India’s image as one of the world’s fastest growing economies and a welcoming destination for international businesses.
Here’s what makes us so optimistic.
For starters, rather than bring about unemployment for a few, the move stands to create over 10 million jobs within the sector and give our economy a boost through overseas investments coming into India. This in turn is also expected to bring down inflation, drastically. Experienced international players like Wal-Mart, Tesco and Carrefour will help re-organise the sector, currently comprising of 10 percent organised retail businesses (like Reliance), but dominated by a number of small scattered family run businesses; and make it more efficient.
Next, the agenda states that fresh farm produce cannot be branded and 30 percent of all inputs have to be sourced from small enterprises. The Bill also comes with a mandatory provision that 50 per cent of the infrastructural investments made by the organisation would be in rural back end infrastructure. This immediately protects agricultural interests and smaller businesses while preserving indigenous skills and resources like textile weaving, leather, gems, jute etc. Currently, 30-40 percent of fresh produce goes waste and more than half of this can be brought to the market if the proper farm-to-fork infrastructure is in place. Reform proponents contend that overseas retail chains will invest in back-end infrastructure such as cold and supply chains, making them more efficient, reducing wastage of farm produce and ensuring that farmers get paid more even as consumers pay less. By reducing the need for hyped up middle-men, small farmers will be able to improve their productivity and realization by selling directly to large organized players.
Now, as per the bill, multi-brand entities will have to bring in an investment of $100 million (Rs500 crore), while for single-brand entities, the retail presence has to be directly through the owner. This barrier prevents companies from coming in, making a profit and then disappearing. With the amount of investment coming in, not only does the retail sector benefit, but so do sectors like real estate. The Future Group has aggressive expansion plans, looking to add 9 million sq. ft over the next three to four years to its existing footprint of 15.5-16 million sq. ft. Meanwhile Reliance Retail, the retail unit of Mukesh Ambani-led Reliance Industries Ltd?, has 22 formats and has been aggressively expanding its retail business over the past few years to achieve revenue of Rs. 5,019.71 crore in fiscal 2011. The decision will help many domestic companies reduce some of their debt.
Finally, the Bill calls upon companies to set aside a proportion of their profit for corporate social responsibility; as well as touches upon topics like more efficient fraud check mechanisms and heftier penalties for promoters in the wrong.
FDI in India stood at $22.5 billion between January-September this year, a 41% increase over the corresponding period last year. The arguments may continue, but the advantages definitely out-weigh the cons.