Retail Sector
  • Review of the policy on Foreign Direct Investment (FDI) in Multi-Branded Retail Trading
    04 Aug, 2014

    The Union Cabinet approved the proposal for amendment in the existing FDI policy in Multi-Brand Retail Trading (MBRT) in para 6.2.16.5(1) (iii), (iv) and (vi) of `Circular 1 of 2013 - Consolidated FDI Policy.

    a) Amendment in para 6.2.16.5(1) (iii) of `Circular 1 of 2013- Consolidated FDI Policy` to read as follows: “At least 50% of total FDI brought in the first tranche of US$ 100 million, shall be invested in `backend infrastructure` within three years, where `back-end infrastructure` will include capital expenditure on all activities, excluding that on front-end units. For instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure. Subsequent investment in the back-end infrastructure would be made by the MBRT retailer as needed, depending upon his business requirements”.

    b) Amendment in para 6.2.16.5(1)(iv)of `Circular 1 of 2013 - Consolidated FDI Policy` to read as follows: “At least 30% of the value of procurement of manufactured/ processed products purchased shall be sourced from Indian micro, small and medium industries which have a total investment in plant & machinery not exceeding US $ 2.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. The `small industry` status would be reckoned only at the time of first engagement with the retailer and such industry shall continue to qualify as a `small industry` for this purpose even if it outgrows the said investment of US$ 2.00 million, during the course of its relationship with the said retailer. Sourcing from agricultural co-operatives and farmers co¬operatives would also be considered in this category. The procurement requirement would have to be met, in the first instance, as an average of five years` total value of the manufactured/ processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis”.

    c) Amendment in para 6.2.16.5(1)(vi) of `Circular 1 of 2013 - Consolidated FDI Policy` to read as follows: “Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per the 2011 Census or any other cities as per the decision of the respective State Governments, and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking”. The amendment in the extant FDI policy relating to Multi-Brand Retail Trading in respect of `small industry` will bring in a balance between the business exigencies of the MBRT entity and intent of the policy which is to extend the benefits of the FDI policy in multi-brand retail trading to a larger constituency of small industries. The amendment in the provision regarding `back-end infrastructure` will give more clarity to the policy. The amendment to the provision regarding location of retail outlets will bring in parity in the policy as it is proposed to extend such dispensation to all States.

    Permitting FDI in multi-brand product retail trading

    The Cabinet has approved the proposal of the Department of Industrial Policy & Promotion for permitting FDI in multi-brand retail trading, subject to specified conditions. The proposal had earlier been approved by the Cabinet in its meeting on 24.11.2011. However, implementation of the proposal had been deferred, for evolving a broader consensus on the subject.

    In pursuance of the afore stated decision of the Cabinet on 7.12.2011, discussions have been held with State Governments, representatives of consumer associations/organizations, micro & small industry associations, farmers’ associations and representatives of food processing industry and industry associations. The Chief Ministers of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana and Governments of the State of Manipur and the Union Territory of Daman & Diu and Dadra and Nagar Haveli, have expressed support for the policy in writing. The Chief Minister of Jammu & Kashmir, through his press statements, has publicly endorsed the policy and asked for its implementation. The State Governments of Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have expressed reservations.

    FDI MultibrandRetail sales outlets may be set up in those States which have agreed or agree in future to allow FDI in MBRT under this policy. The establishment of the retail sales outlets will be in compliance of applicable State laws/ regulations, such as the Shops and Establishments Act etc. Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking; In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.

    At least 50% of total FDI brought in shall be invested in `backend infrastructure` within three years of the induction of FDI, where ‘back-end infrastructure’ will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.

    A high-level group under the Minister of Consumer Affairs may be constituted to examine various issues concerning internal trade and make recommendations for internal trade reforms. Other conditions/safeguards, approved by the Cabinet on 24.11.2012, would remain unchanged. The suspension of Government’s decision taken in the Cabinet meeting on 24.11.2011 to permit FDI up to 51% in MBRT, therefore, stands removed.

    The respective State Governments administer the Shops & Establishment Act within their territorial jurisdiction. “Trade & Commerce within the State” is a subject allocated to the State Governments, under the Constitution of India. State Governments are also responsible for aspects ancillary to MBRT, such as zoning regulations, warehousing requirements, access, traffic, parking and other logistics. As such, the policy provides that it would be the prerogative of the State Governments to decide whether and where a multi-brand retailer, with FDI, is permitted to establish its sales outlets within the State. Therefore, implementation of the policy is not a mandatory requirement for all States.

    Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census (including an area of 10 kms around the municipal/urban agglomeration limits of such cities). On the other hand, States/ Union Terrritories, which do not have any city with a population exceeding 10 lakhs, but are desirous of implementing the policy, would have the flexibility to do so. Thus, the revised condition gives primacy to the decision of the States in this regard, recognizing that the FDI policy constitutes, at best, an enabling framework for the purpose.

    Amendment of conditions in the policy on Foreign Direct Investment in single-brand product retail trading

    The Cabinet has approved the proposal of the Department of Industrial Policy & Promotion for amendment of the existing policy on Foreign Direct Investment in Single-Brand Product Retail Trading. Vide Press Note 1(2012 Series) dated 10.1. 2012, Government had permitted FDI, up to 100%, in single brand product retail trading, subject to specified conditions, including, interalia, the conditions that: (i) The foreign FDI in Retailinvestor should be the owner of the brand. (ii) In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen. `Small industries` would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a `small industry` for this purpose. The compliance of this condition will be ensured through self-certification by the company, which could be subsequently checked, by statutory auditors, from the duly certified accounts, which the investors will be required to maintain. The CCEA has approved modification of the above mentioned conditions, for the activity of single brand product retail trading, as under: (i) Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country, for the specific brand, through a legally tenable agreement, with the brand owner for undertaking single brand product retail trading in respect of the specific brand for which approval is being sought. The onus for ensuring compliance with this condition shall rest with the Indian entity carrying out single-brand product retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/ franchise/sub-licence agreement, specifically indicating compliance with the above condition. (ii) In respect of proposals involving FDI beyond 51%, sourcing of 30%, of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading.

    Regarding the condition that 30% sourcing be mandatorily done from Indian small industry, investors have pointed out that it would be difficult to comply with this condition in the case of very specialized/high technology items. Global single brand retailers are often engaged in the business of retailing specialty/high-tech products. Such products are niche products, wherein it may not be viable for the foreign investors to build capacities wherever they engage in retailing, owing to the specialized requirements of quality and precision which the local small industry may not be able to provide. Investors are, therefore, of the view that the condition of 30% mandatory sourcing from Indian small industries/ village and cottage industries, artisans and craftsmen, is acting as a deterrent to the desired foreign investment in this activity.

    FDI in RetailThe other category of products relate to the entire range from household appliances, utensils, furniture, crockery to furnishings, etc. These products are far more amenable to sourcing from MSMEs, village and cottage industries, artisans and craftsmen. Therefore, the proposed modification of the condition is envisaged to take into account the circumstances of both the specialized/high technology niche products, as well as the general category, covering a wide range of items. The fact that 30% domestic sourcing is being mandated would imply that the single brand retailers would have to build production capacities in the country, either in existing units, or set up new ones, catering specifically to their sourcing requirements. Hence, even the 30% domestic sourcing is expected to develop production capacities in the country, with the attendant global best practices, relating to design, production and quality. Since single brand retailers are global players, Indian suppliers and vendors to these retailers would have an opportunity of becoming a part of their global supply chains. Thus, Indian products could find their way in the stores of these single brand retailers located in other countries, thereby augmenting exports from India as well.

    Thus, the amended condition relating to sourcing of 30%, of the value of goods purchased, being done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where feasible, is expected to benefit Indian producers, including the Indian handicrafts sector, which provides livelihood to millions and is important from the point of low capital investment, high value-addition and high potential for export, as also to meet the critical need to integrate Indian producers with the domestic and global markets. Skill integration with craftsmen abroad is likely to help develop synergies with international brands and generate more employment. The consequential benefits, arising from the integration of global best practices in management, along with global standards in quality, design, packaging and production, would help build capacities of local producers, by making it worthwhile for them to scale-up their production, thereby creating a multiplier effect on employment and income generation. This would also lead to up-gradation of technology, which, in turn, would have a further multiplier effect on the economy.

    The retail sector in India

    The retail sector in India is the second largest employer after agriculture. As per the NSSO 64th Round, in 2007-08 retail trade employed 7.2% of total workers and provided job opportunities to 33.1 million persons

    Fashion AccessoriesThe share of employment in the broad sector of trade, hotels and restaurants in the year 2008-09 was significantly higher compared to its share in 1993-94 for both males and females,in rural, as well as urban areas. More than 2/3rd of the total employment, in the broad category of trade, hotels and restaurants, is in the retail sector. According to IBEF, the Indian retail business values at around US$ 550 billion as of now and about four per cent of it accounts for the organised sector. A report by Boston Consulting Group (BCG) has revealed that the country’s organised retail is estimated at US$ 28 billion with around 7 per cent penetration. It is projected to become a US$ 260 billion business over the next decade with around 21 percent penetration. According to FICCI estimates, the Indian retail industry has experienced high growth over the last decade with a noticeable shift towards organised retailing formats. The industry is moving towards a modern concept of retailing. The size of India’s retail market was estimated at US$ 435 billion in 2010. Of this, US$ 414 billion (95% of the market) was traditional retail and US$ 21 billion (5% of the market) was organized retail. India’s retail market is expected to grow at 7% over the next 10 years, reaching a size of US$ 850 billion by 2020. Traditional retail is expected to grow at 5% and reach a size of US$ 650 billion (76%),while organized retail is expected to grow at 25% and reach a size of US$ 200 billion by 2020.

    The US-based global management consulting firm, A T Kearney, in its Global Retail Development Index (GRDI) 2011, reported thatChina and India both fell out of the top three markets for retail development this year. As India’s retail industry is aggressively expanding itself, great demand for real estate is being created. The cumulative retail demand for real estate across India is expected to reach 43 million square feet by 2013. Around 46 percentof the total estimated demand between 2009 and 2013, expected to come from Tier-1 cities. For instance, Pantaloon Retail added 2.26 million square feet (sq. ft.) of retail space during the fiscal 2011 and booked over 9 million sq.ft of retail space to fructify its expansion plans in future. The annual study outlines investment opportunities for global retailers in emerging markets by ranking the top 30 countries for retail development based on four equallyweighted criteria: country and business risk; market attractiveness; market saturation; and time pressure.

    Though this is one of the fast growing sector, several critical issues had affected this sector. It has been pointed out that lack of investment in the logistics of the retail chain has been leading to an inefficient market mechanism. For example, though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence,perishable horticultural commodities fi nd it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57 percent of which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions. As per some industry estimates, 25-30% of fruits and vegetables and 5-7% of food grains in India are wasted. Though FDI is permitted in cold-chain to the extent of 100%,through the automatic route, in the absence of FDI in retailing; FDI fl ow to the sector has not been significant. As per the National accounts, private final consumption expenditure, increased from Rs19,26,858 crore in 2004-05 to Rs 32,26,826 crore in 2008-09, at an average rate of 13.8 per cent per annum. However, expenditure on some items like transport and communication; expenditure on food in hotels and restaurants; expenditure on rent, fuel and power; and expenditure on education and recreation have gone up signifi cantly. Private consumption expenditure adjusted for items which could be considered, increased from Rs 11,92,405 crore in 2004-05 to Rs 19,93,380 crore in 2008-09,at an average rate of 13.7 per cent. Rate of growth of GDP at current market prices during this period at 14.5 per cent, was higher than this growth.

    Retail MarketsApart from the above factors, the growth of this sector is confronted with several challenges.Shortage of skilled manpower is a critical factor.Front-end/retail assistant profiles in stores form a major proportion of the employment in the retail sector while store operations account for 75-80% of the total manpower employed in the organized retail sector. Unfortunately,
    there are very few courses specific to the retail sector and graduates/post graduates from other streams are recruited. Further, retail training opportunities such as niche courses for areas like merchandising, supply chain and so on are limited. The condition is more alarming in the unorganized sector where the manpower is not equipped with even the basic level of retail specific and customer service skills, which adds to their incompetence vis-à-vis the organized sector. A cohesive effort to develop skills within the sector can have a signifi cant potential impact on productivity and competitiveness, both within the sector and on the wider economy. Secondly the organized retail in Indiafaces diffi culties in procurement of organized financing and fi scal incentives. Also lack of sophisticated retail planning is another major challenge the sector faces. Available space is easily interchangeable between commercial and retail use. In most cities, it is difficult to find suitable properties in central locations for retail,primarily due to fragmented private holdings.

    It is widely expected that the new Goods and Service Tax (GST) would simplify tax structure and would give a critical boos to the retail segment. The abolition of Central Sales Tax (CST) in favour of GST would lead to a reevaluation of procurement and distribution arrangements and the Removal of excise duty on products would result in cash flow improvements. Also the elimination of tax cascading is expected to lower input costs and improve profi tability and the application of tax at all points of supply chain is likely to require adjustments to profi t margins, especially for distributors and retailers.