The consumption road has been fraught with rising retail prices, barely-there infrastructure, lack of trained manpower, disorganised intermediaries and lack of facilitative technologies. For the seller, the journey from the farm to the shop has been an arduous one, one that cannot be taken without the aggressive push of a progressive government. For the buyer, of which there are many dissimilar groups, it has mostly been a journey that is bereft of choice and preference of price. The new foreign-direct-investment (FDI) regulations for the retail sector are a partially inclusive measure; while it embraces the brick-and-mortar retail sellers, it leaves the progressive mobile and e-commerce sellers out in the cold.
The Cabinet Committee on Economic Affairs on September 14 recommended the new reform (regulated via notifications and press notes issued by the department of industrial policy and promotion) permitting 51 per cent FDI in multi-brand retail and relaxing key conditions to investment in the open single-brand retail sector. The Government may have been buoyed by its neighbour China that opened its retail markets partially in 1992 moving steadily to completely opening it in 2004. China registered a doubling in employment levels in the sector, 2.5 million small retailers set up shops compared to the previous numbers of 1.9 million and the country had 600 hypermarkets by 2001.
Measured approach
The new reform is measured in its approach. On the face of it, while it seems that the multi-brand retail sector is now entirely open, it is subject to an individual State’s welcome policy. The Centre has empowered the States to either participate in the growth story by using the state-specific Shops and Establishments Act to permit foreign entrants or use the same legislation to chase them away. The reform mandates that a region should have more than one million people before it can welcome a foreign retailer and details that 30 per cent of sourcing requirements be met from local medium and small scale enterprises over a five-year period. Further, the regulation is insistent that 50 per cent of the proposed FDI be in back-end infrastructure (does not include real-estate costs). This is bound to strengthen supply-chain logistics, make the farm-to-fork journey cheaper, and is a step towards organised retail markets.
However, investment in e-commerce and m-commerce retail activities has been completely excluded from the purview of the reform. The rationale for such exclusion is unclear. Given that e-commerce companies operate without borders, and given that the power to include foreign retailers has been vested individually within each State, this decision may perhaps have been inevitable.
Cut off from funds
A progressive government should have, however, taken into consideration the rapidly changing demographic profile and purchasing patterns. Venture Trends, a research service, recently noted that 54 deals in the e-commerce space worth $400 million were signed in 2011 in the Silicon Valley, the hotbed for deal-financing trends and innovations in technology that Indian financiers and entrepreneurs avidly follow. With the proliferation of mobile devices and the growing popularity of social media, retailers and tech companies are investing aggressively to capitalise on these trends. Investors in turn are infusing a lot of venture capital into this arena. Through this reform (or perhaps its lack thereof), India has cut herself off from this fund flow corridor.
The $496-billion retail market in India is enticing several foreign players partly because 1.2 billion Indians can be accessed through leveraging technology and not solely by visits based on foot-falls at physical stores. Amazon, for example, -- an American e-commerce giant whose market cap is comparable to brick-and-mortar retailers such as Costco and Target -- may reel back plans to directly enter the Indian retail segment and therefore remove choices for more than a million Internet users who could have shopped online at bargain prices for a wide choice of products. The home-grown e-commerce companies — the Amazon wannabes — will have to continue to separate the front-end and back-end operations, as they always have to receive foreign investment to fuel their growth. Innovative structuring will continue to evolve in this space as more funds seek such companies that can reach out to more than 500 million buyers. The success of the retail story lies in striking the balance somewhere between online sales and store sales. Despite the partial inclusion of players in the retail growth tale, measured applause is in order.
(The author is a partner at Vichar Partners, a corporate and dispute-resolution law firm based in Chennai. Views are personal.)