Govt may relax FDI in retail

The government is considering a proposal to ease foreign direct investment rules in the retail sector.

The commerce and industry ministry is working on a concept note to allow up to 51 per cent FDI in multi-brand retail other than primary goods (foods, groceries and vegetables), but with some stiff riders.

Under the existing rules, FDI is not allowed in retail, except for trade of 'single brand' products, where up to 51 per cent foreign investment is permitted. FDI up to 100 per cent is also allowed in wholesale cash-and-carry trade.

The ministry is also keen to permit FDI in retail of foodgrain as well as other essential commodities to create a parallel network to the public distribution system, which has become notorious for its leakages.

The core of the plan is to allow FDI in retail, provided the retail stores are located in cities with a minimum population of one million. The move aims to protect vendors in small cities.

The ministry may also suggest minimum capitalisation norms for companies investing in retail, in addition to a minimum built-up area rule for their retail outlets.

It has also proposed enabling policies to encourage those investing in retail to procure from local manufacturers.

The proposal has been mooted to facilitate a debate among various ministries on the contentious issue of FDI in retail.

The ministry has also called for an alternative to the public distribution system, or simply a parallel retail trade in grains and other essential commodities.

It said FDI should be allowed in this area, too, without specifying the extent, but again with stiff conditions to ensure that companies invest in creating agricultural infrastructure.

The proposal being worked out suggests that 50 per cent of FDI in food retail should be spent towards building infrastructure, logistics or agro processing.

A minimum threshold level for investment in infrastructure and logistics could be fixed to discourage non-serious players.

Also, to ensure the buffer stock is maintained at a desired level, the government can reserve the right of first procurement for a part of a season or could think of a mechanism to collect a certain amount of levy from private traders in case the buffer stock falls below a certain level.

To encourage local employment, the government could ask retailers to reserve 50 percent of jobs in their outlets for rural youth.

Since 2006, when FDI was partially allowed in retail, the government has approved 54 FDI proposals in the sector and the country has received an inflow of Rs 822.70 crore (Rs 8.22 billion).

With 15 million outlets, India's retail sector is highly fragmented. Only 4 per cent of the outlets are bigger than 500 square feet in area and the remaining 96 per are in the unorgainsed sector.

There have been fears that with a liberal FDI regime, the big global retailers would go in for predatory pricing, virtually destroying the small retailers. That is the reason why the government has treaded cautiously in this sector.

Companies such as Wal-Mart , Tesco and Carrefour, some of whom are already in cash-and-carry business, have been trying to convince the government to allow them access to India's retail sector.

However, there is a growing view that FDI, in adition to bringing in large investments, would also help in reducing costs, create new employment opportunities, and improve conditions for small manufacturers and retailers.

And, the advantage of proximity to the consumer and familiarity would ensure that small retailers co-exist with the big boys.