The impending Walmart-Flipkart deal provides the government with a useful opportunity to realign its retail sector policies.
Such realignment is critical for providing a better environment for retail “Foreign Direct Investment” (FDI).
Why is a policy rethink needed in retail FDI needed?
100% FDI is permitted in single-brand retail currently, whereas foreign investors can hold up to 51% FDI in multi-brand retail.
But the realities of the emerging retail paradigms globally are rendering these definitional differences illogical.
The world’s largest retailer (Walmart) and India’s largest online retailer (Flipkart) are expected to ink a deal for business collaboration in India.
This has highlighted the need for the government to embrace an overarching approach for an integrated online and conventional retail policy.
This is vital for maximising the value chain for investors and consumers.
What are the irrational elements in the current policy?
Single Brand - The conditions like “Single-brand retailers have to source 30% of the value of their goods exclusively from India” are constraining.
Significantly, the original proposal was for 30% of the purchases to be made from small and medium units (SMEs), but this was relaxed for 5 years.
Multi Brand - FDI in multi-brand retail is even more restrictive through restrictions that stipulate a minimum investment of $100 million.
Further, at least half this has been mandated for invested in back-end infrastructure, and a 30% local sourcing requirement is also there.
Multi-brand stores are also allowed only in cities with populations of over 1 million – which restricts their establishment to just about 20 cities in India.
E-commerce - In the government’s first ever e-commerce policy that was released in 2016, the government allows FDI in only “Marketplace Models”.
Notably, “Marketplace Models” are aggregator platforms that connect buyers and sellers and have restrictions the platform’s proprietors from directly involving in trade through the platform.
The impact of these convoluted riders is visible in the poor response by global retail investment in one of the world’s largest markets.
Contradictions - Sourcing restrictions apply only to investors like IKEA, Apple or H&M that choose to set up wholly-owned chains.
But scores of brands from Marks & Spencer to Zara that opt to set up their chains via Indian joint ventures are free from all these conditions.
These restrictions raise barriers for investors without offering consumers tangible benefits.
What is the status of companies that have tried to set shop in India?
French retailer “Carrefour” was early entrant into the “cash-and-carry business” (bulk retailer), but is has all but exited in less than a decade.
Tesco made an entry via a joint venture with the Tata group only in 2015 and currently has only back-offices in operations.
Walmart is making a 2nd attempt to enter India after over a decade of trying –significantly, it had exited a joint venture with Bharti about 5 years ago.
In food retailing, the government has permitted 100% FDI in 2017 but only 1 foreign entity (Amazon) has expressed interest thus far.
All this is very little for a market that offers a $650 billion opportunity.
The multiplier effect of retail FDI for employment generation and re-energising the agri-market are obvious – which calls for a policy revamp.
