FDI in Retail

1991: Beginning of Economic Reforms and an era of Liberalization, Privatization and Globalization (LPG) 

2001: Beginning of IT Revolution

2011: Beginning of Retail Revolution

The opening up of FDI (Foreign Direct Investment) in multi-brand retail trade (MBRT) may be the biggest ever reform in agriculture economy and at the same time it may also be the biggest danger to them. The issue need to be analysed in detail. It has fierce supporters and even fiercer detractors.

Current State:

• FDI in multi-brand retail trade is prohibited
• FDI in Single Brand Retail is permitted under FIPB/Government route (from 2006)

The Decision

Multi Brand Retail Trade

FDI in multi brand retail trade permitted upto 51% of capital with Govt approval. It is subjected to following conditions:

1. Minimum amount of FDI is $100 million
2. At least 50% of total FDI shall be invested in "backend infrastructure"
3. At least 30% of the procurement of manufactured/ processed products shall be sourced from `small industries` (which have a total investment in plant & machinery not exceeding US $ 1.00 million.)
      
4. permitted in 53 cities with a population greater than 1 million, as per 2011 census.
5. Government will have the first right to procurement of agricultural products;

Single Brand Retail Trade

Government has decided to increase the limit of FDI in single brand retail to 100% but an additional condition has been kept. If the investment under SBRT increases 51% then 30% of the articles have to be sourced from SMEs/Village and cottage industries. The reason for this increase is the dismal response of the global brands toward the 51% FDI state. The FDI in single brand has been $44.5 million in past five years and is about 0.03% of the total FDI received.

Benefits of opening up Multi Brand Retail Trade

• Leveraging foreign investment in supply chain infrastructure: India seriously lacks the supply chain infrastructure like cold storage, logistics and transport. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular.  Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57 per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions.
• As per some industry estimates, 35-40% of fruits and vegetables and nearly 10% of food grains in India are wasted. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route.  In the absence of FDI in front-end retail, investment flows into this sector have been insignificant.
• Bringing supply chain efficiencies: Foreign retail majors have gained decades of experience, technologies and management practices which will ensure supply chain efficiencies.
• Medium-term impact on regulating food inflation: The opening up of Multi Brand Retail will also have a salutary impact on food inflation as it would contribute to savings to the food which perishes on account of inadequate infrastructure.
• Securing remunerative prices for the farmers: Removal of middlemen will help in benefits accruing to the farmers as well as the retailers. But it would require amendments in the APMC Act (Agriculture produce Marketing Committee Act) to allow direct procurement from farmers. 
• Employment opportunities: Huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistic management and the front-end retail business. Estimates suggest 1.5 million front-end and 1.7 million back-end jobs in next 5 years. Indirect employment in supply chain will also add million of jobs.

Conclusion:

Indian farmer realizes only 1/3^rd of the total price paid by the final consumer as against 2/3^rd with higher degree of retail.  A World Bank Study of 2007 demonstrates that the average price a farmer receives for horticulture produce is barely 12 to 15% of what is paid at the retail outlet.

And as Gandhi has said:

"There is enough for everybody's need but not for everybody's greed"


Glossary:

FDI and FII: FII(Foreign Institutional Investors) are the financial institutions (banks, pension funds, mutual funds, investors) located outside India and which invests in the Indian debt and equity markets through various mediums.

FDI is an investment in a specific enterprise with an aim to increase its capacity/productivity or to change its management control. Here the capital inflows results in increased production. (More details here ) 

Backend Infrastructure:

processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Land cost and rentals are not a part of backend infrastructure.

 

Multibrand and Single brand Retail: Stores where only a single brand is present is called a single brand retail trade while stores or rather multistores where multiple brands are present is a part of multi brand retail trade.

Sectors still not opened for FDI: Arms and ammunition, Atomic energy, Railway Transport, Coal and Lignite, Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper, zinc

APMC Act: This act regulates the procurement of foodgrains from farmers. It mandates that the farm produce can only be sold at the agriculture produce marketing committees. This prevents the private food processing industries from buying directly from farmers. Since this is a state subject, only they can amend this law and many states have already done that to facilitate contract farming.

References:

1. http://pib.nic.in/newsite/PrintRelease.aspx?relid=77619

2. www.indiafdiwatch.org/fileadmin/India_site/10-FDI-Retail-more-bad.pdf

3. http://www.legalindia.in/foreign-direct-investment-in-indian-retail-sector-%E2%80%93-an-analysis