The government is likely to permit foreign direct investment in multi-brand retailing only in the six big metros.
The emerging consensus in the government is that the recommendation of the Department of Commerce and Industry to allow such stores in cities with over one million population is premature.
The six metros in which FDI in multi-brand retailing will be permitted are Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad.
The decision in favour of a 'calibrated' liberalisation, keeping other cities out, is on account of political concerns regarding the impact of the opening up of multi-brand retailing to FDI on small retailers.
The 2001 census reported over 35 cities (up from 23 in the 1991 census) with a population of over a million.
The number will be higher in the 2011 census. The note prepared by the ministry of commerce for the committee of secretaries on FDI in retail has said the cities will be selected on the basis of the 2011 census.
The one million cut-off would lead to inclusion of cities such as Agra, Nashik, Faridabad, Dhanbad, Indore, Vizag, Kochi, Ludhiana, Rajkot, among others.
They account for 11.5 per cent of India's population according to the 2001 census.
While the move would further whittle down the policy, which already has several riders, it
would enable a step by step approach to liberalising the sector.
While FDI up to 51 per cent is proposed, state governments may get the power to decide if they want to allow foreign retailers to open front-end stores in their cities.
The policy also says at least 50 per cent investment should be in back-end infrastructure. The minimum FDI suggested is Rs. 450 crore (Rs. 4.5 billion).
Also, 30 per cent manufactured products should be outsourced from small and medium enterprises, it says.
The approach is based on the China model. China allowed FDI in retail in 1992, but only in six major regions and cities, and limited foreign ownership to 49 per cent.
The number of foreign retailers operating large stores was limited to 50. It allowed 100 per cent FDI only in 2004. It has been able to attract huge investments in the sector without impacting either small retailers or domestic retail chains.
In India, 50 per cent FDI is allowed in single-brand retailing. FDI up to 100 per cent is allowed in wholesale cash-and-carry.
With 15 million stores, India's retail sector is highly fragmented. Only four per cent outlets have more than 500 square feet space. The other 96 per cent are in the unorganised sector.
All key ministries have supported FDI in multi-brand retailing. Kaushik Basu, chief economic advisor in the finance ministry, has said the move will curb prices.
The government is likely to permit foreign direct investment in multi-brand retailing only in the six big metros.