The Hindu Business Line : Retail boom: FDI can give the extra thrust

Fears expressed in certain quarters that FDI in the retail sector will short-change the local kirana stores and smaller players are exaggerated. On the contrary, it will to lead new economic opportunities and generate more employment. The policy-makers would do well not to dither any more over opening the retail sector to FDI, says S. D. Naik

With retail trade expected to grow at a robust pace in the coming years, opening it up to FDI could result in several benefits for the consumer.

THE organised retail business in the country is witnessing a boom and studies by McKinsey and Fitch point out that it is set to grow exponentially in the coming years.

Market liberalisation, a growing middle-class, and increasingly assertive consumers are sowing the seeds for a retail transformation that will bring more Indian and multinational players on the scene.

The big Indian retail players looking to expand their operations include Shopper's Stop, Pantaloon, Lifestyle, Subhiksha, Food World, Vivek's, Nilgiris, Ebony, Crosswords, Globus, Barista, Qwiky's, Café Coffee Day, Wills Lifestyle, Raymond, Titan, Bata and Westside.

Well-established business houses such as Wadia, Godrej, Tata, Hero, Malhotras, etc., are drawing up plans to enter the fast-growing organised retail market in India.

Taking advantage of the retail boom, Himatsingka Seide, India's largest manufacturer of silk and silk-blended fabrics and a 100 per cent export oriented unit, has floated a subsidiary, Himatsingka Seide Wovens, to foray into the retail business with a series of fine furnishings stores, called Atmosphere, across the country.

Similarly, Welspun, a leading manufacturer of terry towels, has entered the domestic retail business with a home textile brand, Spaces, which will offer a range of bed, bath, kitchen and table linen, specifically for the Indian market. The company currently exports to 32 countries.

According to reports, Reliance Industries Ltd plans to enter the retail business in a big way and has identified 18 cities, starting with Ahmedabad, to set up malls. It will spend Rs 30-50 crore on each mall, that are to be modelled after those in Dubai and East Asia.

The international players currently in India include McDonald's, Pizza Hut, Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton, Swarovski, Sony, Sharp, Kodak, and the Medicine Shoppe. Global players are entering India indirectly, via the licensee/franchisee route, since Foreign Direct Investment (FDI) is not allowed in the sector.

Despite all these developments, the organised retail business still comprises a small proportion of the total size of the Rs 9,00,00-crore ($200 billion) retail sector. Retail business s growing at 5-6 per cent per annum. The size of organised retailing was estimated around Rs 26,000 crore in 2004, about three per cent of the total. However, it is now set to grow at 25-30 per cent per annum.

In developed countries, organised retailing makes for over 70 per cent of the total business. In China this segment accounts for 20 per cent of the overall business.

Recently, the Government announced its intention to open up the retail sector to foreign investment. It is still, however, debating whether to allow 26 per cent or 49 per cent FDI in the sector.

Initially, the idea was to begin with 26 per cent and then gradually liberalise it further. However, since China moved from 49 per cent to 100 per cent FDI in this sector last year, the Commerce Ministry and the Prime Minister's Office (PMO) appear to be inclined to go for 49 per cent FDI at one go, despite opposition from Left parties.

Even as the government is debating the level FDI in of retail, a number of foreign players, including the world's largest corporation, the $288- billion Wal-Mart Stores, Inc., have announced their intention to enter India in a big way.

At present Wal-Mart has a presence only in Bangalore through a subsidiary, which used to function as a liaison office till last year; it sourced goods worth about $1 billion from India last year. It is now in the process of setting up offices in New Delhi and Mumbai.

Meanwhile, most large Indian corporate houses that, till last year, were planning to enter the retail sector on their own, are now rethinking their strategy.

With the impending opening up of the sector to overseas investment, they are now keen on forays into the sector in partnership with multinational chains. According to industry analysts, as many as 20 big Indian companies are working on plans to enter the sector in partnership with foreign investors.

Pending the opening up of the organised retail sector to FDI, the Government has already done considerable spadework in this area and has taken some significant decisions aimed at preparing the industry for a quantum jump with the help of FDI.

For instance, it has opened up the real estate sector by allowing 100 per cent FDI in the construction projects. The move is expected to attract foreign funds and new technology into the market. Second, Foreign Trade Policy 2005-06 has extended the benefit of the export promotion capital goods (EPCG) scheme to the real estate sector.

This is expected to tremendously boost the organised retail sector by enabling it to create better and modern infrastructure. Also, the extension of concessional duty scheme for import of capital goods by retailers with minimum area of 1,000 square metres and implementation of VAT will significantly help organised retailing.

Despite all these favourable developments, the Government appears to be still dithering in giving a green signal to FDI in this sector in view of the opposition from Left parties and some sections within the Congress.

It is indeed unfortunate that this issue is hanging fire for nearly four years now, even as the government has allowed foreign investment in a number of sectors including banking, telecom and insurance.

The fears expressed in certain quarters that FDI in retail sector will short-change the local kirana stores and smaller players and that there will be job losses are exaggerated.

Even though organised retailing is set to grow at 25-30 per cent per annum over the next decade, it is unlikely to increase its share beyond 20 per cent.

Since the total size of the retail trade is expected to grow at a robust pace in the coming years and the consumer segments patronising the big malls are going to be different, the traditional outlets are unlikely to be affected.

On the contrary, the opening up of the sector to FDI will lead new economic opportunities and there will be more employment generation.

According to a policy paper prepared by the Department of Industrial Policy and Promotion (DIPP), FDI in retail must result in backward linkages of production and manufacturing and spur domestic retailing as well as exports.

According to sources in the PMO, the opening up of retail to FDI would be designed in a such as way that many sectors — including agriculture, food processing, manufacturing, packaging and logistics — reap benefits. It is understood that the multinationals that invest in retail business in India would also source Indian goods for their international outlets in a big way and thus provide a boost to Indian exports.

Indian retail chains would get integrated with global supply chains since FDI will bring in technology, quality standards and marketing.

According to the World Bank, opening the retail sector to FDI would be beneficial for India in terms of price and availability of products. Experience everywhere has shown that organised retailing tends to have a major controlling effect on inflation because large organised retailers are able to buy directly from producers at most competitive prices.

At Wal-Mart, for instance, prices have not increased in real terms for almost a decade.

The scale of operation and technology help organised retailers score over the unorganised players, giving the consumers both cost and service advantages.

As of now, the Indian retail sector, largely due to its fragmented structure, suffers from limited access to capital, labour and suitable real estate options. In contrast, China, which allowed 49 per cent FDI in the retail sector since 1992, benefited immensely with foreign players bringing capital and new technologies and growing export market for domestic products. At present, around 40 foreign retail players account for almost 20 per cent of the organised retailing in that country.

India is tipped as the second largest retail market after China, and the total size of the Indian retail industry is expected to touch the $300 billion mark in the next five years from the current $200 billion.

The size of organised retailing is expected to touch $30 billion by 2010 or approximately 10 per cent of the total. Various retailers from across the word have been visiting India over the past few months with a view to establishing their presence in a market that is expected to witness exiting developments.

The policy-makers would do well not to dither any more over opening the sector to FDI. FDI will provide a big boost to food products, including vegetables, fruits, fishery and dairy products with food chains going for direct procurement from farmers and investing in cold chains and other infrastructure.

Similarly, textiles and garments, leather products, etc., will benefit from large-scale procurement by international chains. This, in turn, will create more jobs at various levels.

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