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The Big Picture – FDI in Multi-Brand Retail: What is its fate?

The Big Picture – FDI in Multi-Brand Retail: What is its fate?



The debate about allowing or banning Foreign Direct Investment in Multi-Brand Retail has raged in this country for some time now. However in december 2012, then UPA government against much opposition from some quarters including then opposition BJP managed to get the approval. The policy of allowing 51% FDI was accompanied with a condition that individual states will have to clear it. However, eversince there have hardly been any proposals except one from tesco. Meanwhile, the Department of Industrial Policy and Promotion of the government of India has issued a document stating the government’s policy on FDI in multi brand retail. This document reiterated allowing 51% FDI. However, the government has said that it is not in favour of FDI in multi brand retail and the DIPP was only stating the existing policy. Following this the issue has become more complicated with no clarity on what the policy of the government is.

Multi-brand retail was opened up for foreign direct investment, with a 51% cap, in September 2012, when the Congress-led UPA government was in power. In its latest edition of the annual FDI document, the new government had retained the previous UPA regime’s decision allowing foreign retailers to open multi-brand stores with 51% ownership, notwithstanding the political slugfest over the issue.

State governments have some discretionary powers with respect to allowing FDI multi brand retail in India. A key condition is that multi-brand retail outlets can only be set up in those states, which agree to allow FDI in Multi Brand Retail Trading (MBRT). So far, the States of Andhra Pradesh, Assam, Delhi, Haryana, Himachal Pradesh, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan and Uttarakhand and the Union Territories of Daman & Diu and Dadra and Nagar Haveli have approved FDI in MBRT. A foreign investor proposing to invest in MBRT in other states can seek specific consent from the relevant State Government. The policy is so framed because the Constitution of India categorizes “trade and commerce within the State” as a state subject. State Governments have also been given the discretion to prescribe additional conditions to regulate MBRT stores set up in their jurisdiction.

After the release of the FDI document, Finance Minister Arun Jaitley said that the BJP was never in favour of allowing foreign direct investment in multi-brand retail and a recent government notification only published the extant policy on it. This has made the government stand unclear. The BJP in its election manifesto had said that barring the multi–brand retail sector, FDI will be allowed in sectors wherever needed for job and asset creation, infrastructure and acquisition of niche technology and specialised expertise.

After much hue and cry, the government has finally made clear that it will consider repealing the 51% FDI policy in multi-brand retail, while no proposal would be entertained for opening supermarkets in India by foreign players. Traders union CAIT has also asked the government to scrap the policy of 51% IN FDI in multibrand retail sector.

India being a signatory to World Trade Organisation’s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment. In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51% investment in a single brand retail outlet was also permitted in 2006.

FDI in multibrand retail is not free from criticism. Some people say that it would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, 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. Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors. Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector and it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.