Comment

Many Indian organised retailers are cash/profit-starved and many foreign retailers are eager to enter the country to explore and realise the potential of the retail sector. There is a general sense of happiness amongst them that the government has taken a formal step towards opening up multi-brand retail to foreign direct investment (FDI) by way of the discussion paper released earlier this month.

However, the sensitive nature of the issue calls for a thorough discussion and the discussion paper invites comments from various stakeholders on identified questions apart from other issues by July 31.

Though the discussion paper is titled ‘FDI in Multi-Brand Retail Trading’, the issues identified and matters discussed revolve mostly around ‘food retailing’. Multi-brand retailing can be either of ‘food retailing’ or ‘non-food retail’ (such as sportswear, footwear, apparels, jewellery, electronics and books, etc).

Some of the recent studies conducted on consumer habits among youth in India highlight the trend of spend on non-food items in retail trade.

The results depict that among teenagers (aged 17 to 20 years) apparel, books, footwear and mobiles phones account for nearly around 42% of the total discretionary spend. The magnum size of the market makes one wonder if the two should not be decoupled. Should FDI in ‘non-food retailing’ necessarily wait till issues around FDI in food retailing are addressed/ sorted?

The government has reportedly been contemplating permitting FDI in multi-brand retailing of electronics, sportswear, etc for a while now.

Coming to permitting FDI in multi-brand food retailing, it is worth discussing who the potential beneficiaries could be and how. Food retail revolution clearly has the potential to change the economic matrix of the country, influencing almost all key sectors/ sub-sectors.

The discussion paper highlights the benefits to agriculture/ farmers such as increased food production, transport, logistics, cold storage and supply chain, as well as the benefits to customers such as price reduction, quality assurance, enhanced shopping experience and assured supply, etc.

Also, India is already a key sourcing country for some global retailers. The entry of foreign retailers is likely to further promote India’s manufacturing and export sectors, leading to a double bonus for the economy.

Allowing FDI in multi-brand retail can give a big push to the country’s social agenda, too, and has the potential to even positively impact and promote tourism, computerisation, systemisation, government’s ability to influence trade when required, address issues such as inflation (since data available becomes more reliable/ accurate and trade gets increasingly organised), reduction of black economy, control over food hygiene, better food quality assurance and accountability, increased direct and indirect employment, push to real estate and availability of better managerial talent, etc.

Also, the retail revolution can change country’s perception across the globe, integrating it seamlessly into world trade and economy.
Since some of the benefits are linked to supply chain development, which is already open to FDI, some wonder why the entire retail sector should be opened up.

One needs to examine the viability factor to understand that the FDI benefit to supply chain is not fully realised. For the supply chain developers, entering into massive contract farming, large-scale procurement and creating massive integrated supply chains needs organised players with whom their systems can be integrated and demand and scale assured in front-end retailing as well. Without FDI in retail, FDI in supply chain is meaningless.

Hence, it is also worth debating whether it is really necessary to put conditions such as mandatory rural employment creation and mandatory investment in back-end infrastructure, etc while permitting FDI. One needs to be mindful that the conditions do not become a burden, making investment commercially unattractive to start with, in which case the potential benefits of permitting FDI in retail will not be realised in the absence of scale of investments.

Also, one really needs to debate whether there is a need to distinguish between foreign financial institutions and foreign retailers for permitting FDI. There have been cases where private equity investors brought not only capital, but also the right talent and know-how relevant to the sector to make a business successful. In fact, today, some Indian organised retailers may be more in need of funds from private equity players than a strategic tie-up with a foreign retailer.

To summarise, releasing the discussion paper on opening up multi-brand retail is a welcome first step. There is sincere expectation that the government will open the sector to FDI, and act fast on this front, even if it means opening the sector in a gradual and phased manner.

Else, as it is said, justice delayed is justice denied. After Independence and the economic liberalisation in 1990, retail may well be the next revolution. With economic slowdown behind us, the time seems just right to expand the horizons, and realise the potential.

The writer is associate director, tax & regulatory services, Ernst & Young. Views are personal.