FDI in Single Brand Retail

On January 10, 2018, Union Cabinet cleared a proposal allowing 100% foreign direct investment (FDI) in single-brand retail via automatic route. The existing FDI policy on Single Brand Retail Trading allows 49 per cent FDI under automatic route, and FDI beyond 49 per cent and up to 100 per cent through Government approval route.

India’s retail growth

India’s retail sector has shown a tremendous evolution from traditional village fairs and street hawkers to splendid malls and organised outlets. Today this sector contributes more than 10% of GDP and is estimated to be US$ 450 billion of market by economic value. Most importantly, Retail sector in India is the second largest employer after agriculture. As per the latest NSSO 64th Round, in 2007-08 retail trade employed 7.2% of total workers and provided job opportunities to 33.1 million persons.

However the Indian retail market is quite unorganized and highly decentralized. More than 90% of retail trade consists of small retail outlets and mom-and-pop stores’. As compared to other developed countries the share of organised retail trade in India is hardly 5% as compared to 80% in the USA or 20% in China.

Although increase in purchasing capacity, educated youth and rising middle class has changed the face of retail industry is India. In addition to this, government’s liberlised policy in FDI retailing through supermarkets, department stores and other forte chains are escalating. As retail giants such as Tesco and Marks & Spencer have already made inroads into the Indian retail industry the market is expected to get stronger.

What are automatic and government approval routes?

Foreign direct investment in India is regulated through two routes-One is automatic and other is approval route.

  • Under the automatic route the foreign investor does not require the approval of the government or the Reserve bank of India. Therefore, this route is relatively less restricted.
  • Under the approval route the foreign investor needs the mandatory approval of the government or the respective agency in whose domain the FDI falls. The proposals are considered by either Cabinet Committee on Economic Affairs (CCEA) or Cabinet Committee on Securities or Department of Industrial policy and promotion (DIPP). Applications seeking approval for FDI in retail trading are directly approved by the DIPP.

Meaning of single brand retail

Selling of goods under a single brand name domestically as well as internationally is called as single brand retail. However, FDI regulations do not provide any guidance on the meaning of ‘single brand’. This has led to vagueness while dealing with sub brands of a product. In 2013, Marks & Spencer came under scrutiny from DIPP as it was selling multiple sub-brands, such as ‘Autograph’, ‘Blue Harbour’ and ‘Collezione’ at its retail stores, though it had obtained approval for selling only ‘Marks & Spencer’.

According to news reports, DIPP had clarified that it is permissible for a brand to market sub-brands, subject to condition that the main brand’s logo should appear alongside that of the sub-brand. However, since no official clarification has been issued, this remains a grey area.

Below is the chronology of how FDI in single brand got unfolded in India since 1995.

What are the benefits of the new policy?

100% FDI via automatic route in single brand will send positive signals to the foreign players and will give an investor-friendly climate to the investors. They will find it easier to set up their operations in India and consequently it will promote ease of doing business in the country. Moreover, foreign investors will bring in new technology and increase competition in the market especially when today’s consumer is willing to experiment with newer products and services. Above all it will give a boost to the requirement of roles in managing logistics, customer service, covering supply chains etc thus increasing job opportunities.

In the earlier policy for FDI beyond 51%, the mandatory sourcing of at least 30% would have to be done from the domestic small and cottage industries, which have a maximum investment in plant and machinery of about Rs 5 crore. However; it has actually acted as a deterrent for the foreign investors thereby curtailing the investment. Now under the new policy, government has relaxed the above rule. It says the overseas retailers can now set off their incremental sourcing of goods from India for global operations during the initial five years of setting up shop in the country, beginning April 1 of the year of the opening of the first store.

After completion of this five-year period, the retailers will be required to meet the 30% sourcing norms directly towards their India operations on an annual basis. Therefore now the companies will be given some time to settle themselves before sourcing from the local industries.

Why the policy has been criticized?

Primary criticism is that the new policy would facilitate easy entry of MNCs in retail trade of India and the local stores won’t be able to compete with such big stores enjoying huge economies of scale. Consequently, large-scale exit of domestic retailers will take place, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there. One more argument says that the Indian retail sector, particularly organised retail, is still growing, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors

Way Forward

Liberalizing and connecting with the global world has become an inevitable thing today. It brings with itself new opportunities and new mindset. However it is the responsibility of the native country to ensure that the openness of the market should not hurt the domestic players. Till the time it is a win-win situation for both the sides there is no harm in moving ahead. The Indian government has been moving cautiously on this front and has taken a complete decade and gradually opened its retail segment to the foreign investors. Thus, hopefully it will bring more competition and advantages to the industry and the consumers.