| Retail is sunshine sector with tremendous growth potential and fdi can be leveraged for incremental results in the sector, with an india-specific approach |
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Retailing is the largest private sector in India and second to agriculture in employment. India today has perhaps the highest retail outlet density-with approximately 15 million retail outlets. The entire retail trade contributes about 10-11% to Indias GDP and is valued at an estimated Rs 9,30.000 crores. Out of this, organized retailing industry is around Rs 35,000 crores. Organized retailing is primarily urban centric, its share as represented in urban scenario is projected to be 12 to 20%. Growing at more than 30%. The organized sector is driving the retail growth in India and contributes significantly to the growth of the economy. This economic growth comes primarily from increased consumer spending.
India today represents the most compelling investment opportunity for mass merchants and food retailers looking to expand overseas. According to AT Kearneys Annual Global Retail Development Index for 2005-an annual study of retail investment attractiveness among 30 emerging markets-India displaced Russia to move from the second place to the first. Indias retail market, totaling $300 billion, is vastly underserved and has grown at an average rate of 10% in the last five years. This increased spending and consumer confidence is a positive indication for the growth of the Indian economy.
THE PRESENT FDI REGIME AND ENTRY ROUTES
The Central Government in 1997 had taken a careful policy decision of keeping FDI in retail at bay. But the present policy allows India to have a presence of international brands, through different routes as follows:
- Franchise
- Joint Venture
- Manufacturing
· Distribution
- Cash & Carry (100%)
WHAT NEEDS TO BE DONE?
After leading the IT bandwagon, India is poised to grow as a retail hub. It is imperative to sustain the modernization of the retail sector and cater to the growing taste of the Indian consumer and dispel the myth that the game is big vs small or traditional vs modern or organized vs unorganized or local vs foreign. What is needed is to promote consumption-which will ultimately lead to economic growth of the country. For the Indian consumer, the gradual and step-wise entry of foreign companies in retail involves three pivotal changes modern technology, better transparency in dealings and sharing best practices. Today, the question is not of whether "India should open to FDI" but on "when to open" and "how to open". FDI in Retail can be leveraged for in-cremental results in the sector with an India-specific approach keeping the following points in consideration
- FDI should be opened in a gradual phased manner, allowing a lead-time for the Indian retailers to create a level playing field for all. Hence promote competition and contribute to the growth of the Indian economy.:
- Upgrade existing infrastructure and stimulate further development
KEY INITIATIVES THAT THE GOVERNMENT AND THE INDUSTRY NEED TO TAKE TOGETHER
- Ensure that the opening of this sector to foreign players is a win-win for all
- To ensure that Indian retail dynamics are very different from other countries. Hence to ensure that though we learn from global experiences, we do not go all out to "copy global models."
DEFINING THE WAY FORWARD
FDI would serve the purpose of much needed capital and bring a boom in the retail sector. As some of the global retailers are already coming in through other channels there is no justification to keep FDI in Retail on hold. However, the industry also feels that capital formation is needed and this will take at least two to three years time. Hence, retailers, for capital formation, need this lead-time, reiterating the fact that FDI should be allowed gradually. But this should not constrain the growth of the Retail sector. Since the objective of FDI is to increase investment, there is also a need to explore alternative funding routes, in addition to FDI. For example, if a capital turnover ratio of 1:5 is assumed, then it requires at least Rs. 20,000 crores of investment. Hence Foreign Institutional Investors (FIIs) and Venture Capital (VC) firms should be legalized and encouraged for investment in the primary market. FIIs and VC firms are currently allowed to participate in the growth of the listed retail companies present in the secondary market; they have the necessary financial muscle and are increasingly on the lockout to invest in India. Retail is a sunshine sector with tremendous growth potential-allowing them to invest in retail companies in the primary market will enable many of these emerging companies to increase operations, improve infrastructure, set up the latest systems, achieve critical mass and enhance employment opportunities. Another objective of FDI is to enhance infrastructure. While there is no dearth of potential investors in metro cities, the Tier-2 and lesser cities are getting sidelined. FDI should be initially allowed in Tier-2 and lower cities to facilitate infrastructure building. The more such investment, the more incentives to operate in Metro cities. Models similar to airline operators and telecom operators need to be explored. With this the focus would be on incremental business and create a level playing field for all and not on cut-throat competition.
The Government is already considering a host of conditions for bringing in FDI. One of them is to impose a minimum limit of 10,000 sq ft on the floor space of foreign retail chains and limit the number of stores to one per million once FDI in retail is allowed. This also serves to create level playing fields for all players. Also, inclusion of a clause for reserving at least 500-600 sq ft (out of 10,000 sq ft) of retail space for foods & processed foods alone will further help to protect the interests of certain sectors like agriculture and integrate them with the organized retail supply chain. These measures are to be applicable for a short while only, as the Department of Industrial Policy and Promotion (DIPP) is considering easing some of these restrictions with time.
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