The Indian cabinet has passed the bill on foreign direct investment (FDI) and agreed to allow 51% holdings in multi-brand and 100% in single-brand retail, making it one of the biggest economic reforms in the country’s history.
The Indian cabinet has passed the bill on foreign direct investment (FDI) and agreed to allow 51% holdings in multi-brand and 100% in single-brand retail, making it one of the biggest economic reforms in the country’s history. The government is expected to proceed with the conditions proposed earlier this year whereby investors must invest $100m (£64.3m) to set up their multi-brand operations and only operate in cities with a population of at least 1 million. Of the total investment, half will have to be channelled to develop back-end infrastructure such as cold storage and laboratories.
Capital investment and accelerated market consolidation will help to deliver efficiencies in the current supply chain system. With increased competition, retailers are more likely to tie up with farmers and help them transport goods, so they won’t have to rely on existing, inefficient procedures. The new rules will allow the country to address issues of food price inflation.
With the relaxation of FDI, we expect established players such as Walmart and Tesco to jump into the top retailer ranking in the next five years. Walmart partnered with Bharti in an equal joint venture and together operate Best Price Modern Wholesale cash and carries across India. Now FDI rules have been relaxed further, Walmart would almost certainly be interested in acquiring a majority stake. Tesco will also be able to increase its stake in its existing joint venture with Trent, the retail arm of the Tata Group, while Germany-based Metro Group, which has been operating in India since 2003, has stated that it is not interested in business-to-consumer operations in the short term.
The 100% ruling on single-brand retailers will also encourage interest from international players that prefer to expand through owned operations. For example, Ikea president and chief executive Mikael Ohlsson is visiting India with a view to “announce strategic initiatives for Indian market”.
Ikea has sourced many materials from India for a long time but has been waiting to open stores. Furthermore, we are also likely to see the market entries from other retailers such as H&M, which has traditionally entered international markets through owned stores, and Gap, which up to now has not secured a franchise partner in India,despite expressing interest.
It will take a while for the guidelines to be enforced, giving international companies enough time to team up with the right partner and expand in a fragmented retail market.
- Isabel Cavill, senior retail analyst, Planet Retail.
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