Retail FDI note raises more questions than it answers

The government’s media release announcing up to 51% foreign direct investment (FDI) in multi-brand retail raises several interesting points as well as questions.

One of the major points is that organised retail outlets may be set up only in cities with a population of more than 10 lakh as per 2011 census. There are 45 cities in India that meet this requirement.

Currently eight states, the national capital territory of Delhi and the union territories of Daman, Diu and Dadra and Nagar Haveli have agreed to allow FDI in multi-brand retail. But as per the 2011 census, only 20 of the 45 cities are in states that have agreed to FDI in muti-brand retail.

Interestingly, the census has two classifications. One, “cities” having population of one lakh and above. Two, “urban agglomerations/cities” having population of one lakh and above. As per the former definition, India has 45 cities which have a population of 10 lakh or more. As per the latter definition, India has 53 urban agglomerations/cities with a population of 10 lakh or more.

For the sake of this analysis, “cities” has been used because the government’s press note uses the word “cities” very clearly and not “cities/urban agglomerations”. But even if one works with the assumption of 53 cities, the analysis that follows doesn’t change much. Nevertheless, the government needs to clear this confusion.  

Maharashtra leads the pack with 10 cities out of the 20 which qualify for big retail. These are Aurangabad, Kalyan-Dombivili, Navi Mumbai, Mumbai, Pimpri-Chinchwad, Pune, Nagpur, Nashik, Thane and Vasai-Virar. In Andhra Pradesh, three cities meet the criteria: Hyderabad, Vijayawada and Vishakapatnam. Three cities in Rajasthan also do: Kota, Jaipur and Jodhpur. Srinagar in Jammu & Kashmir, Faridabad in Haryana (and not the fancied Gurgaon which has a population of 8,76,824 as per the 2011 census), New Delhi and Chandigarh are the four other cities that make the list. Chandigarh is the capital of Haryana which has agreed to allow FDI in big retail. But it is also the capital of Punjab, which hasn’t.

Interestingly, 50% of the cities eligible for big retail are in one state, Maharashtra. It also means that there are no cities in Assam, Manipur and the union territories of Daman, Diu and Dadra and Nagar Haveli which meet the criteria. 

To get around this, the government note allows companies to set up retail outlets in cities of their choice, preferably the largest, in states and union territories not having cities with population of more than 10 lakh as per 2011 census.

But the most interesting part of the note is that most of the policies elucidated in the note are only enabling in nature. Hence, governments in states and union territories are free to make their own policies. This means that it is very well possible that states might allow big retail to set shop in places with a population of less than ten lakh. What stops the state of Haryana from allowing big retail presence in the city of Gurgaon? Or Maharashtra allowing big retail in Mira Road-Bhayander which has a population of 8,14,655 as per the 2011 census? The same can be said about Secunderabad, which is Hyderabad’s twin city, and Jammu which is the second largest city in Jammu & Kashmir.

Another point in the note is that at least 50% of total FDI brought in shall be invested in ‘back-end infrastructure’ within three years of the first tranche of FDI. The note doesn’t specify whether this investment is to be limited in states that have allowed big retail. So the conclusion is that this investment can be made all across India. But here is where practical problems might crop up.

A company like Wal-Mart may set up back-end infrastructure in a state like Himachal Pradesh to source apples. But as we know, Himachal Pradesh isn’t on the list of states that have allowed FDI in big retail. So we will end up with a situation where big retail is present in a state at the back-end but at the same time it’s not allowed to set up a front-end retail store. That would not be an ideal situation.

Another major problem can crop up because of the decision being left to the states. The states that have agreed to big retail are all Congress-ruled (except Kerala which is ruled by the Congress-led United Democratic Front but hasn’t said yes to big retail). Now what happens if the Congress party loses the next election in these states? Can the party or the front which comes to power reverse the earlier decision?

The note also points out that the government will have the first right to procurement of agricultural products. What is implied by this? At the same time, the note points out that at least 30% of the value of procurement of manufactured/processed products purchased, shall be sourced from Indian ‘small industries’ which have a total investment in plant and machinery not exceeding $1 million.  This will be a huge problem for big retail companies which play on economies of scale.

But at the same time, the note is silent on international procurement of goods and products by these companies. This means that companies which invest in big retail can source their products internationally. Hence, a Wal-Mart can source products for the Indian market from China. “More than 70% of the goods sold in Wal-Mart stores around the world are made in China,” point out Garry Gereffi and Ryan Ong in a case study titled Wal-Mart in China which was published in the Harvard Asia Pacific Review. Sourcing from China has been the backbone of Wal-Mart’s everyday low-pricing strategy.

The state governments that allow FDI in big retail can change any of the policies mentioned above and frame their own policies because these policies are only enabling in nature. The only part that they cannot change is retail trading by means of e-commerce.

Kaul is a writer and can be reached at vivek.kaul@gmail.com