FDI floodgate opens: Hard work lies ahead!

September 14, 2012 was a red-letter day in the Indian economy and politics. In one sweeping move, the Congress-led UPA government opened the FDI floodgates in the key sectors: the $ 505 billion (multi-brand) retail, power trading exchanges, broadcasting and the ailing civil aviation, along with divestment of stakes in four Public Sector Units (PSU). The idea was to completely change the public discourse about the Manmohan Singh government's policy paralysis, both nationally and globally.

While many state governments, traders' union and opposition leaders are fuming, FDI supporters and the media has hailed it as the greatest reform on the lines of the historic 1991 liberalisation, coincidentally by Manmohan Singh, the then finance minister. The pro-reform lobby and experts suggest that this will greatly boost the overall retail and agriculture sector in the country. Major foreign retailers like Walmart and Carrefour have welcomed the news, saying this will help them expanding their operations in India and increase their commitment to the rapidly growing economy.

But experts and leading industrialists suggest the real work lies ahead. The government has to seriously look at implementing the APMC (Agricultural Produce Marketing Regulation) and the GST, for the benefits to filter down to the 700 million strong farming populace on India.

"It's great to finally have a green signal from the government on FDI in multi-brand retail. As such, the policy fine print remains the same, but nevertheless this is a good starting point which will bring revival sentiments in the economy," Govind Shrikhande, Managing Director, Shoppers Stop told TSI. "Along with this decision, a clarity on the APMC Act, GST and availability of real estate at affordable prices can really change the industry. Shoppers Stop may consider partnering a foreign firm for expansion funding and procuring global technology,” he added.

Chandrajit Banerjee, Director General, CII, said, “We urge the government to implement measures such as removing the Perishables from the APMC list, uniform implementation of APMC Act and announcing investment incentives for post harvest agri–infrastructure to address the supply side constraints in the agriculture sector which have been exerting pressure on food inflation. CII also shares the concern with RBI on the fluctuating international oil prices and suggests that a separate window be created out of the foreign exchanges reserves to fund the petroleum imports by the OMCs directly.”

To keep absolute dissent at bay, Commerce Minster Anand Sharma stated that state governments have the freedom to take a stand on whether they want to implement the 51 per cent multi-brand retailing in their states. While many states have bitten the government bullet, others like West Bengal, UP, Bihar and Gujarat have decided to stall the multi-brand FDI move. The government has ensured riders like 30 per cent of the procurement has to be local (which some critics say needs to be increased as it will allow more foreign made labels in India), and has asked retailers like the Walmart and Carrefour to allocate 50 per cent of their investment in backbone infrastructures such as processing, manufacturing, storage, warehouses and packaging.
Many farmer associations have expressed hope that it will put more money in the hands of farmers, who were at the mercy of middle men and traders so far. Normally the practice is, if a produce is bought at Rs 1 from a farmer, it appreciates to Rs 4 once it reaches the city consumers (middlemen and mandi prices adding to it). While critics say this will be a death blow to the over 12 million small mom-and-pop store owners' families in the country, retail experts and company operators believe that more investment in retail will help lower prices, reduce farm produce wastage and ease supply-side inflation.

The foreign retailers are currently allowed to open their stores only in cities with more than one million population. Currently, India has 53 such cities. Overall there are roughly 8000 cities and small towns in the country. So far foreign firms were allowed 100 per cent stake in cash and carry wholesale formats, and a 51 per cent stake in single brand retailing, which has been now increased to 100 per cent.

R V Kanoria, President, FICCI said that 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,” added Kanoria.

Industry association PHDCCI also said recent big-bang reforms undertaken by the government will push India’s real GDP to a 8 per cent growth trajectory in the next fiscal. "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," said Sandip Somany, President, PHDCCI.