Easing the FDI Rules


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September 2013

What is the Indian Government doing to attract global retailers?
In recent times, Foreign Direct Investment in Retail has been a contentious topic of debate in India. From dissecting the terms and conditions under which FDI is allowed, to its ramifications on the Indian marketplace, this issue has caused much political controversy and social upheaval because of its economic impact on millions of small and medium enterprises. And when it wasn't political, ambiguity around the entry rules kept major international retailers at bay.

In an effort to welcome international retail chains, the Indian government has relaxed FDI norms; some attribute it to the intense lobbying by various retail giants. This article discusses the relaxations and their likely impact.

The mandatory 30% local sourcing clause has been diluted. As per the revised terms, a global retailer will still have to source 30% of their products from small and medium Indian enterprises, but will be given five years to reach that target, and thereafter it has to be met on an annual basis. While this relaxation allows foreign retailers the option to import goods from overseas initially, and is viewed as a WIN for retailers in for the long haul, the protection the earlier cause provided to the SMEs is under threat.

According to the new laws, international retailers can open stores in cities that have a population of less than one million. Which means, foreign retailers can now operate in more than 53 cities across India. However, this is allowed only in states that do not have even a single city that has more than one million in population. While this decision is meant to bring parity across states, the actual impact would be limited as state governments still have the final say on FDIs. The penetration impact of this decision will be debated in the coming days.

Regarding back-end investment, the new law now allows global chains to invest 50 percent of an "initial" mandatory investment of $100-million on back-end infrastructure at the market entry stage, as opposed to half of the entire investment previously. These investments can include "design improvement" apart from other back-end infrastructure requirements.

The Indian central government also approved a plan to tighten norms for 'control' of firms to ensure foreign players do not overwhelm any joint venture.

Despite these relaxations, the industry view is that retailers will continue to wait and watch until the 2014 general elections. While most acknowledge the importance of this decision to the economic well-being of the country, one cannot ignore the populist agenda that politicians typically try to capitalize during elections.

It will be interesting to see how things evolve in the weeks and months to come. Hopefully, the wait will not be in years.