FDI in India:

What’s all the

discussion about?

The cabinet said OK for 51% FDI in multi-brand retail sector & 100% FDI in single brand. On one hand farmers will benefit from it but on the other

hand small traders feel they will not be able to withstand the competition. Will India in general benefit from this step?

The Foreign Direct Investment (FDI) in any country abroad is the net inflow ofinvestment (capital or other), in order to acquire management control and profitsharing or the whole ownership of an accredited company operating in thecountry receiving investment. The foreign direct investment generallyencompasses the transfer of technology and expertise, and participation in thejoint venture and management. Highly productive advantages of foreign directinvestment have constantly been harvested by both government and privatecompanies and organizations all over the world.

India ranks third in the list of most attractive FDI destinations as per Ernst&Young's 2012 European attractiveness survey

India is fast gaining importance world-wide as the country has become aninvestment hub over the last decade. Global investors have retained their faith inthe resilient Indian economy even during the toughest of the times. As a result,India enjoyed high foreign inflows and investments when rest of the world wasstruggling to even survive.

According to a UN report, foreign investments in India could increase by morethan 20 per cent in 2012-13.

Last year the government had attempted to allow 51 per cent FDI in thesegment but had to suspend the move following widespreadopposition, including from its own allies.

It, however, had gone ahead with increasing FDI in single brand retail to100 per cent from the earlier 51 per cent with a condition that 30 per centof products must be sourced from small and medium enterprises in India

FDI in ‘Single brand’ retail implies that a retail store with foreign investment can onlysell one brand.

In single-brand retail, FDI 100% per cent is allowed, subject to Foreign InvestmentPromotion Board (FIPB) approval and subject to the conditions that:

(a) Only single brand products would be sold (i.e., retail of goods of multi-brandeven if produced by the same manufacturer would not be allowed),

(b) Products should be sold under the same brand internationally,(c) Single-brand product retail would only cover products which are branded during

manufacturing &(d) Any addition to product categories to be sold under “single-brand” would require

fresh approval from the government.

For example: If Adidas were to obtain permission to retail its flagship brand inIndia, those retail outlets could only sell products under the Adidas brand and notthe Reebok brand, for which separate permission is required. If grantedpermission, Adidas could sell products under the Reebok brand in separate outlets.

FDI in Multi Brand retail implies that a retail store with a foreign investment cansell multiple brands under one roof.

Opening up FDI in multi-brand retail means that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household itemsand grocery directly to consumers in the same way as the ubiquitous’kirana’ store.

Policy: 51% FDI allowed

Multinational companies and Chinese goods will flood the market atcheaper rates and there will be no takers for local products

Entry of MNC supermarket and hypermarket chains would cause severedisplacement of small and unorganised shopkeepers and traders

MNC retailers will push prices paid to farmers and manufacturers downrather than raising them, and producers unable to accept suchconcessions would simply go out of business

Improvement in the supply chain: FDI allows end-to-end integration inthe farm to folk supply chain. With that investment wastage levels cango down significantly

The technology transfer that will happen because of the integrationbetween the retail chain and the farmer will ultimately lead to aproductivity improvement

Employment creation

The entry of …

With bigger brands like Walmart, Starbucks and Carrefour eyeing the Indianmarket, why is Ikea’s entry in India under the spotlight?

The single brand retailer is looking to invest Euro 1.5 billion (around Rs 10,500Crore) over a period of 15 to 20 years. In a phased rollout, it plans to set up 25furniture stores, restaurants and food marts under the IKEA brand. While initially itwould invest Euro 600 million (Rs 4,200 Crore), another Euro 900 million (Rs 6,300Crore) would come later.

Conditions from government:

•Mandatory sourcing of at least 30% of the value of products sold would have tobe done from Indian small industries/village and cottage industries, artisans andcraftsmen', when foreign investment in a venture exceeded 51%

The rule was designed to ensure that India's manufacturing sector benefits fromforeign money rather than being muscled aside by imports. But it represents aheadache for retailers looking for scale and reliable, high quality suppliers.

Concern for India:

•Luxury brands who may not have anything to source from India would prefer tocontinue with 51%

• Other Brands: If they find small companies to partner in India to source productslocally, giving business to them would mean they would soon breach thedefinition of small companies according to the Indian government. Scaling upbusiness would require more investments in plant and machinery, leading to thesmall suppliers breaching the investment ceiling specified for SSIs in the policy.

Image Source: ET

IKEA has asked for a 10-year window to comply with the rule; a time frame the government considers to be too long.

Expected changes in policies for single-brand:

• Local sourcing norms could be modified with the 30% requirement applying tocosts and not to sales, as currently stipulated. Retailers are likely to be allowed tomeet these norms over a period of time and not from the first day of operations.

• Moreover, the condition that retailers can buy only from vendors whoseinvestment in plant and machinery is less than $1 million, in order to meet thissourcing requirement, will also be relaxed.

For multi-brand:

• The new rules may commit supermarkets to strict local sourcing requirements andminimum investment levels aimed at protecting jobs.

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