FDI in Indian retail sector and EU business

by Asif Parvez – Innovatori Europei India

The ruling coalition government (UPA) of India has hung the ‘Open’ sign for foreign retailers. The cabinet has cleared 51% FDI in multi-brand retail sector and 100% FDI in single brand. Now the pros and cons of this huge step are being highlighted to much extent; the path to FDI in retail sector for foreign players seems not easy and clear.

Prime Minister of India, Dr. Manmohan Singh on Tuesday, 29^th Nov 2011 said that “the government’s decision to allow foreign equity in retail has not been taken in haste but after a careful thought to how it would benefit the common man in India”. He added, foreign direct investment (FDI) in India’s retail sector would benefit farmers as “this will bring latest technology to India” and improve its agriculture sector by saving farm produce from being destroyed.

On one hand farmers will benefit from it but on the other hand small traders feel they will not be able to withstand the competition. Will India in general will benefit from this move? It’s for sure with FDI being allowed in multi-brand retail, the Indian retail scene is set for a dramatic makeover and has triggered a new dimension on retail sector. One immediate area that we can foresee is dynamism is supply chain management, the know-how and the technology. It will empower the Indian farmers who at the moment loses anywhere between 30% and 40% of their produce. Above all, what’s also exciting will be to watch is the changing shopping paradigm of the Indian consumer. More players, both Indian and Foreign including the local “kirana” stores will open a space for competition and hypercompetetion (leader or follower; value chain efficiencies; core or distinctive competencies; and financial capital).

The decision is likely to clear the decks for the entry of foreign retail giants such as Tesco (UK), WalMart (USA), Metro (Germany), Ahold (Netherlands) and Carrefour (France), which have been waiting in the wings for long to have a taste of the $450-billion  (organized and disorganized) retail Indian market. The proposal for 51 per cent FDI in retail has come with certain riders, including approval to be taken from the Foreign Investment Promotion Board (FIPB), a minimum investment of $100 million by the foreign investor, putting 50 per cent of the total FDI in back-end infrastructure and procurement of 30 per cent of the products from small scale industries. China, Indonesia, Russia, Thailand, South Africa, Argentina and Chile have allowed 100 per cent FDI in multi-brand retail. The key conditions for allowing 100 per cent FDI in single-brand retail are: selling products under the same brand name internationally; product retailing will cover only those products that are branded during manufacturing and the foreign investor should be the owner of the brand.

Terming it as a major step towards unleashing the second generation reforms, India Inc has given thumb ups to the Government’s decision to allow 51 per cent FDI in multi-brand retail, stating the move would help bring in the much-needed capital required for rural infrastructure development. The Confederation of Indian Industry (CII) said it strongly supported the introduction of FDI in multi-brand retail as it would benefit consumers, producers (farmers), small and medium enterprises (SMEs) and generate significant employment.

But naturally, the announcement has also evoked strong criticism from Opposition parties, including the BJP (the main opposition party) and the Left.  Opposition parties and some of UPA allies are demanding a rollback of the reform allowing foreign supermarket giants to enter the country’s $450 billion retail market.  The BJP believes that allowing foreign investment in multi-brand retail would adversely impact the retail sector, which is growing, and put the country’s entire food chain system into the hands of foreign firms. SP (an UPA ally) leader Mulayam Singh repeated the threat of BJP leader Uma Bharati to set Walmart stores on fire if they came up in Uttar Pradesh (the largest state in India in terms of size of population with 200 million people, often termed as the 5^th largest country on globe in itself). Ridiculing claims that opening of foreign direct investment (FDI) in multi-brand retail will lead to displacement and unemployment, Union Commerce and Industry Minister, Anand Sharma,  asserted that this bold move would lead to creation of 10 million jobs and billions of dollars in investments during the next three years.

The overall benefit of FDI in retail trade is “a 360 degree advantage,” according to the Confederation of Indian Industry (CII).  In a true potential scenario, opening up of FDI can increase organized retail market size to $260 billion by 2020. This would result in an aggregate increase in income of $35-45 billion per year for all producers combined; three-four million new direct jobs and around four-six million new indirect jobs in the logistics sector, contract labour in the distribution and repackaging centres, housekeeping and security staff in the stores.   The government, too, stands to gain by this move by transparent and accountable monitoring of goods and supply chain management systems. The government can be expected to receive an additional income of $25-30 billion by way of a variety of taxes. FDI can help SMEs supply in large volumes, increase quality and become a vendor to international players.

India-EU business links in numbers and FDI:

India is an important trading partner for the European Union (EU) and a growing global economic power. India-EU relations dates back to early 1960s. India was among the first countries to establish diplomatic relations with the (then) European Economic Community (EEC). India combines a sizable and growing market of more than 1.2 billion people with a GDP growth rate of between 8 and 10 % – one of the fastest growing economies in the world. Although it is far from the closed market that it was twenty years ago, India still also maintains substantial tariff and non-tariff barriers that hinder trade with the EU. India-EU free trade agreement (FTA) is likely to be finalized by the first quarter of 2012. The EU, as a bloc of 27 countries, is India’s largest trade partner while India was EU’s 8th largest trade partner in 2009. The total bilateral trade increased by 28% to Euros 67.78 billion in 2010 compared to Euros 53.03 billion in 2009 (Indian exports of Euros 32.99 billion and Indian imports of Euros 34.79 billion). In 2010, total Indian exports to the EU in different services sector were Euros 8.1 billion whereas total Indian services imports from the EU were Euros 9.8 billion. EU investment to India has more than tripled since 2003 from €759million to €3 billion in 2010 and trade in commercial services has tripled from €5.2billion in 2002 to €17.9 billion in 2010. Owing to current economic crisis, FDI inflows from the EU to India declined from Euro 3.4 billion in 2009 to Euro 3.0 billion in 2010. India’s investment into EU has also seen a marginal decline from Euros 0.9 billion in 2009 to Euros 0.6 billion in 2010. The most important countries in the EU for FDI into India are Germany, UK, France and Italy.

In the background of above developments, this move definitely opens a entirely new chapter for EU businesses which are looking forward to have their footprint in Indian growing retail market.

Source(s) : European Union-India FDI, Newspaper (The Hindu, The Economic Times, The Times of India), European Commission, Eurostat etc.