A government panel recently approved a proposal to allow further foreign direct investment (FDI) into India’s retail sector, a move aimed at opening the country’s huge retail market to foreign retailers.

A government panel recently approved a proposal to allow further foreign direct investment (FDI) into India’s retail sector, a move aimed at opening the country’s huge retail market to foreign retailers.

If accepted, this would be one of the country’s biggest economic reforms.

As per the proposal, recommended by the Committee of Secretaries, international companies could now be allowed to own as much as 51% of their retail stores and 100% of wholesale or cash and carries.

Foreign investors will have to invest at least $100m (£61.8m) to set up multi-brand retail operations and only operate in cities with a population of at least 1 million people.

Of the total investment, half will have to be channelled to develop back-end infrastructure such as cold storages and laboratories. The proposal now awaits the federal cabinet’s approval.

While this is neither the final step nor a complete opening up of India’s tightly regulated retail sector, it is seen as a significant move that could open a major growth market for US and European companies. This is the first major reform by India’s ruling United Progressive Alliance, which is facing criticism for its reluctance to push through significant reforms despite being returned to power with a majority mandate in May 2009.

Under current regulations, only single-brand retailers like Marks & Spencer and Nike are allowed to bring in up to 51%FDI.

Interestingly, India and China are the only two markets in the world where the big three grocery giants, Walmart, Carrefour and Tesco, compete.

Retailers such as Walmart, Carrefour and Tesco may gain discreet access to the country’s fragmented retail market. Further FDI relaxation could result in new retail alliances forming such as Carrefour looking for a partner and perhaps Walmart evaluating its relationship with Bharti.

India’s tight FDI rules are aimed at protecting traditional retailers, which continue to dominate in areas where less than 10% of consumers shop at modern grocery stores.

The changes, should they be accepted, would not only encourage foreign retailers to invest, but also address supply chain and high inflation problems. 

However, the issue of fully liberalising India’s retail sector continues to be hotly debated.

  • Manu Ghai, analyst, Planet Retail. For more information contact us on:

Tel: +44 (0)20 7728 5600

Email: info@planetretail.net

 

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