New Delhi: India opened its retail, aviation, broadcasting and power sectors to foreign supermarkets on September 14, a major economic reform that has been stalled for months by political gridlock and came as part of a package of measures aimed at reviving growth. Foreign direct investment (FDI) in India's largely unorganised retail sector will help curb inflationary pressure by easing supply side constraints and revive economic growth, analysts said. However, some experts have the opinion that it could hamper firms hoping to set up shop in the world's second-most populous country.
FOREIGN DIRECT INVESTMENT IN INDIA
New Delhi: India opened its retail, aviation, broadcasting and power sectors to foreign supermarkets on September 14, a major economic reform that has been stalled for months by political gridlock and came as part of a package of measures aimed at reviving growth.
Foreign direct investment (FDI) in India's largely unorganised retail sector will help curb inflationary pressure by easing supply side constraints and revive economic growth, analysts said.
However, some experts have the opinion that it could hamper firms hoping to set up shop in the world's second-most populous country.
Following are key aspects of the policy:
States to decide on implementation
Individual state governments will decide whether to allow foreign supermarket chains to enter. The Congress party-led government hopes this will take the sting out of opposition from regional parties who say the policy will destroy jobs.
Opponents of the reform include Mamata Banerjee, the chief minister of West Bengal and the most powerful ally in Prime Minister Manmohan Singh's government.
FOR: Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Jammu & Kashmir, Manipur, Daman & Diu and Dadra and Nagar Haveli are in support of the UPA government’s move.
AGAINST: Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have formally stated their opposition.
Sourcing from small companies
Foreign retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than USD 1 million. Supermarket chains will certify compliance with this themselves.
The government will reserve the first right to procure food produce from farmers before companies do, in order to provide stocks for its food subsidy schemes for poor households.
Foreign retailers will have to invest a minimum of USD 100 million, and put at least half of their total investment into so-called 'back-end' infrastructure, such as warehousing and cold storage facilities.
This requirement has to be met within three years of a retailer setting up shop.
The aim is to meet one of the key justifications for opening the supermarket sector to foreign players -- revamping the country's crumbling infrastructure and unclogging bottlenecks.
The bottlenecks fan inflation, which has proved a major headache for the government and the Reserve Bank of India.
Policymakers argue opening the sector will help ease prices for a country where hundreds of millions live in dire poverty.
Foreign retailers will only be allowed to set up shop in cities with a population of more than 1 million. In states where there are no cities with such a big population, individual state governments can choose where to allow foreign chains to open.
Critics of the new retail policy, including from opposition parties and domestic traders, say opening the doors to the likes of Wal-Mart will wipe out the country's small, family-run neighbourhood stores and trigger mass unemployment.
By restricting foreign firms to cities, the government hopes the supermarkets will become accessible to the country's swelling middle class, while protecting the livelihoods of shopkeepers in smaller towns and rural areas.
Indian Economy: FACTBOX
According to the latest Central Statistical Organisation (CSO) data, the Indian economy grew at a sluggish 5.5 percent in the April-June 2012 period as compared to 8 percent in the corresponding quarter of the previous year.
The GDP growth had slumped to a nine-year low of 5.3 percent in the quarter ended March.
The decision to push forward the reform process has come at a time when business sentiments have taken a beating, GDP growth is near decade low, inflation remained stubbornly high and the government was criticised for "policy paralysis".
India an ideal FDI destination
A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. India has seen an eightfold increase in its FDI in March 2012.
As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware.
Mauritius, Singapore, US and UK were among the leading sources of FDI for India.
According to Ernst and Young, foreign direct investment in India in 2010 was USD 44.8 billion, and in 2011 experienced an increase of 13 percent to USD 50.8 billion.
Know what experts said
• Sandip Somany, president, PHD Chamber of Commerce and Industry
"FDI in multi-brand retail is seen as a very important reform to revive the economy and it will ease supply side pressures and mitigate inflation and benefit, especially, the small and medium enterprises by way of greater market access and higher profit margins.”
Somany said overseas investments would boost business confidence in Indian economy.
"FDI infuses technological advancement, enhance production possibilities and induce capital flows, which helps in maintaining general macroeconomic stability," said Somany.
• Sanjay Dutt, executive managing director, South Asia, Cushman and Wakefield
“Allowing FDI in multi-brand retail was a "much awaited" and "much needed" initiative. In the next 12-24 months, international retailers will accelerate their entry strategy. As a result, the developers involved in shopping centre development, who were badly hit since 2008, will also get a tremendous boost and we will witness serious players expanding in this space.”
"Over the medium- to long-term, the retail sector, real estate industry and the end-consumers will benefit from the move and the economy on the whole will gain momentum, depth and size," he added.
• A Sakthivel, chairman of the Apparel Exports Promotion Council (AEPC)
"It will give the much needed fillip to the entire textiles industry. Employment opportunity will be created in plenty. Manufacturing activities will get a boost. The overseas investors would help create better infrastructure in India's retail sector that would benefit farmers as well as end users.”
"Farmers will get better price of the produce as well as consumer will derive value for their money. It will lead to easing of inflation in the country. Gradually GDP will pick up and economic outlook will improve," Sakthivel said.
• Ajay Jakhar, chairman, Bharat Krishak Samaj
“The government should have done more to address the concerns of farmers. We are not exactly thrilled as we would have hoped for more conditions to help farmers become a part of India's growth story.”
• Adi Godrej, president, Confederation of Indian Industry (CII)
"The move to open up multi-brand retail is a major step in the right direction and this will not only end a long standing uncertainty in policy making but also boost investors' confidence besides promoting supply chains in the agriculture sector.”
• R.V. Kanoria, president, Federation of Indian Chambers of Commerce and Industry (FICCI)
“The decision would usher in a retail revolution in the country. There are several benefits that would flow from this decision. We will see infusion of new technology across the agriculture value chain as well improvement in the back end infrastructure.”
"There will be a multiplier effect in terms of employment generation and domestic manufacturers will benefit as they integrate with the supply chains of global retail majors. Consumers will have a wider choice and get better deals," Kanoria added.
• Abheek Barua, Chief Economist, HDFC Bank, New Delhi
"If you are looking for ... a direct trigger factor that has led to all this being bunched together and pushed through in a bit of a rush, I would think that it's pressure from the rating agencies."
"If this sustains, and it's not sort of rolled back on Monday or something, it certainly does the trick (to stave off a rating downgrade)."
• Samiran Chakraborty, Regional Economist, Standard Chartered Bank, Mumbai
"These measures were pending for a long time and the government has now shown political courage to push things through. The process of clearing all these got delayed and it is just that all are coming together.
"As an immediate impact, business and consumer sentiment will improve, stock market will improve. But I don't think RBI will cut rates after these measures because the impact of these steps on supply side will only be in the medium term.
"The government's intention is to pacify rating agencies or convince them that government is taking the right steps. This should buy some time and rating agencies may wait for the final fiscal deficit number before deciding on India's rating."
• Kishore Biyani, Chairman, Future Group, Mumbai
"We are hoping this time the government will stick to its decision (allowing FDI in multi-brand retail) because that is absolutely essential.
"The decision to let individual states decide on whether they want it is a good decision. This should satisfy people who are opposing it. The industry is convinced once a few states implement it the others will see the benefits and definitely consider it as well."
• Pinakiranjan Mishra, Partner Retail, Ernst and Young, Mumbai
"This time the way the government decided to implement the decision to allow foreign players is smart. Now there is no pressure on states who do not want to implement it.
"This should calm the opposing allies and the opposition parties."
"When Value Added Tax was introduced, states had the option to choose whether they wanted to implement it in their states and eventually everybody opted for it when they looked at its benefits. FDI in retail should be a similar case."
• Rajan Bharti Mittal, Managing Director, Bharti Enterprises, Gurgaon
"This is a landmark decision in India's economic reforms process. Development of organised retail in India will bring immense benefits to stakeholders across the value chain - from farmers to small manufacturers and above all to consumers.
..This decision will open the doors for much needed technology and investments to develop the entire retail ecosystem in the country."
• Praveen Khandelwal, General Secretary, Confederation of All India Traders
"It is unfortunate that despite opposition from their own allies they have chosen to again reopen foreign investment into the sector. It is surprising the government has again reopened the sector without announcing any solid measures to protect small traders.
"We will oppose this move even more strongly this time and are hopeful the government will roll back its decision just the way they did last time."
• Sharan Lillaney, Aviation Analyst, Angel Broking, Mumbai
"FDI in aviation has always been approved, this is just an approval for foreign airlines. This was not something out of the extraordinary, so there is no question of it being reversed."
"I don't think there will be a flurry of investments, but airlines in better shape will definitely see interest from foreign airlines, such as SpiceJet, Indigo or Jet."
"There are a lot of people interested."
• Rajiv Anand, MD and CEO, Axis Mutual Fund, Mumbai
"This is something that we have been waiting for many years, but what is also interesting is the pragmatic approach that has been taken where rather than try and get 100 percent consensus across states, what they have indicated is FDI in retail is permitted as long as each state government has the flexibility to approve it. So some states might approve it today while others may wait for a while, so looks like there is no scope for a rollback like last time."
"I think the total that has been looked at for disinvestment is about 15,000 crore rupees (150 billion rupees), I think the government will be able to raise that sort of money easily through a mix of foreign, domestic retail and institutional money."
• Srividhya Rajesh, Fund Manager, Sundaram Bnp Paribas Asset Management, Chennai
"These are the measures which were expected for a long time now. The moves will have long-term implications. If the conditionalities are not too harsh, the decisions would result in sharp jump in foreign fund inflows.
"It's a big opportunity for the foreign firms because India is a growth market and they are mostly operating in mature markets. These moves show the government is working on all fronts to revive growth."
• Siddhartha Sanyal, Chief India Economist, Barclays Capital, Mumbai
"This is not a coincidence but looks like a gameplan to meet some possibly internally set deadline as the government might want to go back to the rating agencies and try to convince them with these measures. The reason for the timing also could be because the political cycle is coming to a close in a few weeks time with Gujarat elections in November."
"The positive impact could be on stocks which should have a positive kickback impact on disinvestment and, therefore, fiscal consolidation. In a situation like this, improved sentiment will have a broad impact. I don't think the market will behave very negatively even if there is a marginal roll back because market will focus on the positive actions."