Unshackling Big Retail

| Updated on March 12, 2018 Published on August 04, 2013

Allowing States to decide which cities foreign retailers can sell in is a good move and a potential game-changer.

The recent relaxation in foreign direct investment (FDI) norms for multi-brand retail will provide greater operational flexibility for global supermarket chains and yield positive results in the long run. The most significant of the policy amendments is the one enabling foreign general retailers to set up shop in any town or city in India, subject to approval by the appropriate State Government. This replaces the existing rule restricting such retail outlets to cities with a one million-plus population. Only 53 cities, of which 37 are in States that have refused to implement FDI in retail, were covered by this. Under the new norms, a Walmart can sell to consumers not only in Jaipur or Jodhpur but even Ajmer, Alwar or Bhilwara — provided the Rajasthan Government agrees. Similarly, Haryana can henceforth permit Tesco to launch in smaller places such as Ambala, Rohtak and Panipat, and not just Faridabad.

Big global retailers may actually find it attractive to open stores in tier-2 and tier-3 cities where real estate is much cheaper than in the big metros. Moreover, purchasing power in these centres has grown impressively in recent times; also, those residing there may well show a greater interest in buying from foreign retail chains than their more consumer-savvy big-city counterparts. Allowing large retailers to expand their footprints to smaller cities will also benefit farmers in the hinterland, since the former always prefer to source from areas closer to their outlets. Confining Big Retail to Bangalore or Delhi will not encourage sourcing of vegetables beyond Kolar or Meerut, whereas one of the main stated purposes of opening the sector to foreign chains was to help integrate the farm economy with urban markets. That can only happen through supply chains that link up remote rural areas and not by just those in the vicinity of large cities.

The other significant amendment pertains to the norm on 30 per cent compulsory procurement from small and medium enterprises. The existing rule not only defined an SME with a paltry investment limit of $1 million, but ruled that units would lose this status once the value of their plant and machinery crossed this threshold. Apart from penalising firms for the ‘crime’ of growing, this would have discouraged retailers from building long-term relationships with suppliers. The Government has now doubled the investment limit and clarified that the SME status would remain even if a firm were to outgrow it during the course of its engagement with a retailer. Ideally, the SME mandatory sourcing requirement should be totally dispensed with. So long as foreign retailers are predominantly buying from within India and not flooding their stores with Chinese stuff, the size of suppliers hardly matters. A weak rupee will force them to source locally anyway.

Published on August 04, 2013
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