India likely to loosen FDI rules

Global retailers are awaiting yet another imminent change of policy by the Indian government over foreign direct investment, hoping tough rules constraining growth may yet be further loosened.

Foreign direct investment (FDI) is a contentious issue in India where retail is more or less a traditional sector of the economy.

Most retail in India is still undertaken on a small-scale local level by individual operators of so-called “kirana” stores; retail’s share of employment is overshadowed only by agriculture.

Retail trade in India is estimated at about US$450 billion per year, but initiatives to form national conglomerates and bring some organisation and order to the industry sector have been largely unsuccessful.

Indians fear giant multinational operators as Walmart and Ikea may displace local trading communities, and that low cost goods imported from China may cost jobs in India’s factories. 

Commerce and industry minister, Anand Sharma, has been behind a resolution to permit FDI for multi-brand retail. But left-leaning political parties in India’s parliament oppose any further relaxations and have made their position clear in a letter to prime minister Manmohan Singh.

But earlier this month Singh lauded the example of investor confidence made up by the example of Swedish Ikea, a view which the trade minister elaborated by mentioning the local sourcing Ikea already has committed itself to.

Although the government now seems willing to relax the restrictions, somewhat, it may not be willing to grant Ikea the 10 year grace period it is asking for before full compliance with the rules.

Single-brand stores operated by foreign direct investors were given the go ahead last January but only if at least 30 per cent of product was sourced from small-scale operators and if the level of investment in plant and machinery does not exceed US$1 million. This was designed to protect small scale from being overrun by mass imports.

Saloni Nangia, senior VP for retail at Technopak consultants comments: “The government is in damage control mode. It realises it has sent out a wrong signal by putting the 30 per cent sourcing requirement for foreign retailers.”

Multi-brand retailers such as Wal-Mart will benefit from proposed reforms allowing investments not exceeding 51 per cent ownership not only in the wholesale sector but also in the retail sector. Under FDI rules, trading firms may operate as group ventures and sell within the limits of these. But the volume must not exceed 25 per cent of the total turnover.

According to a proposal made by the Department of Industrial Policy, only 51 per cent subsidiaries should be accepted as ‘group companies’. What constitutes a ‘group company’ has yet to be clarified.

GB

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