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The detail in retail PDF Print E-mail
Tuesday, 07 May 2013 00:00
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Another rider for FDI in retail to contend with

 

After showing tremendous maturity in dealing with various types of opposition to foreign investment in single-brand retail, the government seems to be coming with one new hurdle after another when it comes to foreign investment in multi-brand retail. In the case of single-brand retail, a key irritant pointed out by potential investors like Ikea was the clause that defined SMEs as those who had plant and machinery of under $1 million—under the original proposal, single-brand retailers would compulsorily have to source 30% of their local sales from such firms. This made little sense because, once an Ikea, to use an example, got a supplier to invest in plant and machinery to produce goods of acceptable quality, the unit would likely cease to be an SME since its investment would exceed $1 million. A pragmatic government then relaxed the condition by saying it was “preferable” that such sourcing be done by single-brand retailers.

Which is why it comes as a surprise that the government is not showing the same willingness to accommodate valid objections from multi-brand retailers. The compulsory sourcing from SME clause, for instance, has not been diluted in the case of multi-brand retailers even though it is obvious it makes business sense for such firms to source as much as possible from local suppliers as this cuts time-to-market. More important, the definition of SMEs, a key irritant, has not been relaxed, which means that once the supplier to a Walmart or a Tesco invests in putting in new plant and machinery, the supplier will most likely cease to be an SME. This is when the restriction on the number of cities that foreign retailers can operate in is, in any case, very restricted—in Maharashtra, for instance, foreign multi-brand retailers can only operate out of Mumbai, Pune and Nagpur, cities with some distance between them and with very distinct consumer preference. If this wasn’t enough, commerce and industry minister Anand Sharma has added another clarification to say that 50% of the investment made by foreign investors has to be in greenfield back-end infrastructure—the original policy just had the 50% stipulation without saying whether the investment had to be brownfield or greenfield. While this has probably been done to increase investment in back-end infrastructure, adding one irritant after another isn’t conducive to giving investors the feeling India is open to business.

 
 

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