Government finally sees the light on FDI in retail
Although it’s almost a year now since the multi-brand retail space was thrown open to foreign players, not one global retailer has evinced interest so far, as the fine print was intimidating if not confusing. Moreover, despite repeated requests, the government failed to clarify many of the clauses or to dilute them. At one point, Walmart, which has been in India more than six years now, told the authorities it was not in a position to comply with a key condition, namely that it must mandatorily source 30% of its requirements of manufactured and processed products from local small and medium enterprises. Indeed, when the government came out with its big bang FDI reforms last week, a key missing ingredient was clarity on retail. That appears to now have been fixed with the commerce ministry moving a Cabinet note that addresses most of the concerns of investors, and perfectly reasonable ones at that.
Since few big retailers actually invest in back-end infrastructure—while that is vital for the business to survive, it is done by third-party specialised vendors—the condition that 50% of total investments had to compulsorily be made in back-end infrastructure has been clarified. Since a minimum $100 million investment is required in the first tranche, this 50% will apply only to this, not to the cumulative investment. The compulsory sourcing clause was also problematic since, while retailers have no problem developing local SME vendors, the investments the SMEs have to make to produce good quality supplies takes them out of the SME ambit very soon. What is now proposed is to double the $1 million investment limit for SMEs and to say that even if an SME’s investment goes up later, all sourcing from it will be considered as fulfilling the commitment—this not only helps retailers, it is a big positive for SMEs who can now aspire to be part of a global supply chain at some point in time. If the Cabinet okays the commerce ministry’s suggestions, the threshold population for a city in which stores can be opened—earlier at 1 million—will also be done away with and state governments can choose the towns and cities where they want global retailers to do business. This should ideally open up a bigger catchment for retailers since the bigger states that aren’t averse to letting in foreign players might allow them into towns with a population of less than one million. Retailers may still hesitate to start operations in a big way given the political uncertainty and may wait for the election results to be in, but at least it can’t be said the government didn’t do its best to facilitate their entry.