India's Invested Interests.

 

August 2012


The role of Foreign Direct Investment (FDI) within retail is a hot topic in India right now, with some calling for urgent foreign capital to save failing businesses and others outraged at the very real possibility of vast unemployment at the hands of FDI. There's also the added complication of India's unorganized retail that constitutes a considerable portion of the country's retail market and is largely made of family-run, local businesses at the heart of communities nationwide. But while the issue is being debated out on the streets and in parliament, perhaps it's best understood through an overall view of India's experiences of FDI.

A Brief History

It wasn't until 1990 that India changed its stance and began introducing economic reforms that allowed a controlled level of foreign investment. The current Prime Minister, Dr. Manmohan Singh - then serving as Finance Minister - created a program in conjunction with the World Bank that opened India's doors to foreign investment once more. This saw an end to a policy that was introduced after India gained its independence and, still reeling from negative experiences dating back as early as the British Colonial Period, restricted such investment.

Where We Are Now

As of today, the rules concerning foreign investment allow for up to 100% FDI in sectors that don't require an Industrial License. To pave the way for greater foreign capital within retail, the government adopted a two-pronged approach with laws that tackled single-brand and multi-brand FDI separately. The proposal is for single-brand to operate with 100% FDI, while multi-brand is to be capped at 51%.

The Retail Reaction

While the reaction has been positive for the single-brand proposal, it has been overwhelmingly negative towards that of the multi-brand. Amidst public outcry and political opposition, the government has had to halt the multi-brand proposal, while managing to clear the way for single-brand retail. This decision has retailers like Ikea and Louis Vuitton planning their foray into India. Walmart is focusing more aggressively on its joint venture with Bharti Enterprises, with more Easyday stores continuing to be opened. Starbucks has finalized a partnership with Tata Global Beverages and plans on opening its first store in Mumbai this year. And Dunkin' Donuts, alongside Jubilant Foodworks, has large-scale plans for some 100 stores over the next 5 years.
 
The reaction among Indian retailers has been divided, with organized retailers actively advocating for the bill to be passed and unorganized retailers voicing concerns about unemployment. Many retailers believe that foreign capital will greatly benefit the industry, even as big businesses like Big Bazaar sells of its subsidiaries to lower its debt. Another reported advantage is the expertise in cold storage, as nearly 40% of produce is wasted due to lack of proper storage facilities.

Next Steps

In a tricky balancing act, the Indian government is attempting to build a consensus with all parties involved to move the process forward for the multi-brand proposal and hopes to achieve this soon. And with China and India being key nations for investments, more foreign companies hope to benefit from this reform.