Union Cabinet approved 51 per cent Foreign Direct Investment (FDI) in Multi-brand Retail

The Union cabinet on 24 November 2011 approved 51 per cent foreign direct investment (FDI) in multi-brand retail. The Cabinet also decided to raise the cap on foreign investment in single-brand retailing to 100 per cent from 51 per cent. An estimated Rs 30-lakh-crore retail sector was thus opened to foreign investors by clearing a bill that allows 51 per cent investment in multi-brand retail.

The decision being perceived as game-changer for the estimated USD 590 billion (Rs 29.50 lakh crore) retail market was taken at the meeting of the Cabinet presided over by Prime Minister Manmohan Singh.
India currently allows 51 percent foreign investment in single-brand retailers and 100 percent for wholesale operations but no FDI in multi-brand retail.

Union cabinet arrived at the decision amid opposition by UPA constituents including the Trinamool Congress and DMK. Amid opposition by UPA constituents including the Trinamool Congress and DMK,DMK’s M K Azhagiri too raised objections. Several Congress ministers like A K Antony, Vyalar Ravi and Jairam Ramesh had  reservations about 51 per cent FDI in multi-brand retail. Bharatiya Janata Party (BJP) opposed the decision on the grounds that it would harm self-employed retailers.

About the Provisions

The major provisions for FDI investment include that the minimum investment will have to be $100 million. Retail stores will only be allowed in cities with more than one million people.  Also it will be mandatory for retailers to source a minimum 30 per cent of the value of manufactured goods, barring food products, from small and medium enterprises. Investment up to 50 per cent will have to be in storage and back-end infrastructure.

Advantages

Commerce and Industry Minister Anand Sharma is of the opinion that FDI in multi-brand retail would benefit farmers as well as consumers and Finance Minister Pranab Mukherjee argued that the decision will also strengthen the rural infrastructure.

Allowing foreign retailers to take stakes of up to 51 per cent in supermarkets would attract much-needed capital from abroad and ultimately help unclog supply bottlenecks that have kept inflation stubbornly close to a double-digit clip.

The decision of the governemnt makes 53 cities eligible to have large international retail outlets. Foreign investment in the multi-brand retail is to pave way for global chains like WalMart, Carrefour and Tesco to open mega stores in 53 major cities.

51 per cent foreign direct investment (FDI) in multi-brand retail is expected to bring enhanced employment opportunities, especially in rural India, lend the retail sector to organised investment, and enable technology and infrastructure to permeate in the highly fragmented sector. Multi-brand retail will also benefit the consumers, producers (farmers) and small and medium enterprises and generate significant employment. It will open up opportunities for expansion of organised retail and allow substantial investment in backend infrastructure as well.

Apprehensions

One of the fears expressed was that foreign companies will start by selling cheap to attract people and then, within a year or so increase prices. Those who opposed the decision maintained that self-employment in India is the single largest source of jobs with an overwhelming section of the population being self-employed and allowing 51 per cent foreign direct investment (FDI) in multi-brand retail might adversely impact the self-employed.

History

FDI in cash and carry or wholesale trade, was allowed way back in 1997 during the United Front Government.  Foreign investment of up to 51 per cent in single brand retailing came to India in January 2006.
A decision on FDI in the retail sector had been delayed in view of concerns that it would adversely impact domestic kirana shops, which account for over 90 per cent of retail trade. the advocates of the FDI however argued that  the conditions imposed by the government for investing in the sector will serve as sufficient safeguards for small retailers.