FDI in retail: Cabinet approves 51% in multi-brand

& 100% in single-brand retail

ET Bureau Nov 25, 2011, 02.36am IST

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 walmart|
 Tesco|
 single-brand retail

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NEW DELHI: An embattled UPA government has hung the 'Open' sign for foreign retailers,
ending years of prevarication on an issue that had become a litmus test of its commitment to
take forward the next phase of economic.

The cabinet on Thursday faced down opposition from within and outside to allow foreign
retailers to own a 51% stake in the multi-brand retail sector, paving the way for global groups
such as Walmart, Carrefour and Tesco to open supermarkets in India.

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It also allowed 100% FDI in single-brand retail, a decision that will encourage companies such
as Sweden's homeware firm Ikea and clothing retailers Gap and H&M to set up shop. Until now,
foreign firms were allowed 51% in single-brand retail, while being allowed to own 100% of back-
end cash-and-carry operations that serve wholesalers.
The cabinet decision, confirmed to ET by several ministers who attended a late evening meeting
and set to be formally announced by the government in Parliament on Friday, provided the
spark for a series of realignments in the country's fledgling organised retail sector. For instance,
the world's biggest retailer Walmart indicated that it would extend its 'back-end' partnership with
the Bharti Group into front-end retailing soon, possibly by picking up a stake in Bharti Retail.
"We have a good relationship with Bharti in the back-end. It is only natural that we will carry this
to the front-end," said Raj Jain, head of Bharti-Walmart India. This will in one stroke give US-
based Walmart access to Bharti's Easy Day stores that sell directly to consumers.
The government's decision is fraught with great political risk during what is perhaps the weakest
phase in its nearly eight years of governing India. The proposal was opposed by two
constituents of the ruling coalition — Trinamool Congress and the DMK, a senior cabinet
minister said.
 "There was some opposition and concern about announcing it in Parliament but Pranab babu
(FM Pranab Mukherjee) prevailed," another cabinet minister told ET.

Industry Lauds Bold Decision

Besides its coalition partners, the decision could expose the government to criticism in
Parliament as the principal opposition party, the BJP, and the Left parties are opposed to
allowing foreign firms in India's retail sector.

But the government's decision to press ahead in the face of opposition won it plaudits from
industry, especially at a time it has been pilloried for indecision and policy paralysis. Opening up
the retail sector was a key item in a list of suggestions put together by top business leaders for
the government as part of ET's Agenda for Renewal campaign.

To blunt some of the expected political criticism of its decision, the government will allow foreign
retailers to set up 51%-owned retail ventures subject to minimum investment conditions.

Each retailer will have to bring in at least $100 million in foreign direct investment, half of which
will have to be invested to create back-end infrastructure. The government will have rights of
purchase over farm produce, 30% of all sourcing will have to be from small industry and these
retailers will be permitted to open stores only in cities with minimum 1 million population. Only
42 cities meet that condition today. Governments that are opposed to foreign retailers may be
offered the freedom not to allow them in their states.

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Faced with stunted growth in their home markets, foreign retailers jumped at the prospect of
getting access to India's consumers who have more money in their hands, travel more, and
aspire for a better life.

The decision to allow foreign majority investment in multibrand retail, besides being the panacea
to the government's image problem, will allow cashstrapped Indian retailers to tap sources of
capital and over the medium to long term give authorities a weapon against inflation.

"It is a step which will have positive implications for various segments such as food processing,
farming and SMEs," said Harsh Mariwala, president of industry body Ficci, adding that it could
bring more investments not just in the front-end but also in the back-end infrastructure, resulting
in "reduced wastages" and "addressing the issue of inflation over a period of time".
Jain of Walmart said: "We are willing and able to invest in backend infrastructure that will help
reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and
ease supply-side inflation."

630 billionA study by CRISIL Research estimated fruit and vegetables worth 380 billion worth
stock loss was merelywere wasted in 2009-10. Out of this, due to the large number of people
involved in the supply chain. Organised retail, analysts say, can help reduce this wastage.

"Retail industry needs technology and investment in the backend supply chain, cold storage
facilities, warehouses, IT infrastructure and logistics for procurement of produce from farmers.
Investment in both back-end and front-end retail is extremely challenging," says Ajay D'Souza,
head of industry research at CRISIL Research.

The decision will throw a lifeline to some cash-strapped domestic retailers, especially those that
have been waiting to exit this sector because of lack of money and experience. While some may
find it tough to even stump up the 49% equity, for others, the decision could give them access to
capital to think of expansion.

"We'll certainly look at partnering with a foreign retailer but primarily for the hypermarkets
business," said Govind Shrikhande, managing director of department store chain Shoppers
Stop.