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India Revises FDI Regulations

The Indian government has relented to pressure from overseas retailers and revised some of the rules for foreign direct investment in multibrand retailing.

NEW DELHI — The Indian government has relented to pressure from overseas retailers and revised some of the rules for foreign direct investment in multibrand retailing.

This story first appeared in the August 5, 2013 issue of WWD.  Subscribe Today.

Although foreign retailers have been studying the $500 billion Indian market with steady interest over the last few years, and the government threw open the doors last November amid chaos and protests in Parliament, multibrand retailers remained wary of setting up operations that are 51 percent FDI owned and 49 percent locally owned.

Unveiling the changes last week aimed at spurring FDI in multibrand retailing, Anand Sharma, commerce minister, said on Thursday that more “clarity was required to benefit [global] retailers.”

Overseas retailers can now set up stores in any city, a major shift from the earlier stipulation that foreign stores could only be opened in cities with populations of more than 1 million. There are only 53 cities that have a population above that level, and the previous rule allowing each state to make its own decision as to whether to allow foreign retailers limited the opportunity even further.

Several foreign retailers commented that they were still concerned about the uncertainty in a preelection year, in terms of central as well as state government.

The opposition Bharatiya Janata Party and several other political parties have been vociferously opposed to opening up the retail sector, citing damage to mom-and-pop stores, a large voter base and still making up more than 90 percent of all retail in India, which is still unorganized.

“Investors also need an assurance that there will be no possible reversal in the policy owing to the political situation,” said Kumar Rajagopalan, chief executive officer of the Retailers Association of India.

The earlier proposal that 50 percent of the money invested by foreign companies needed to be spent on back-end logistics, including logistics, warehouses and packaging, within the first three years of the first amount brought also has been amended. Now only 50 percent of the initial $100 million brought in needs to be mandatorily invested in those areas.

Foreign companies have complained that this investment level was valid in the case of supermarkets, which would need to spend heavily in those areas anyway, but what about companies that manufactured and sourced entirely from other locations?

As Crisil Research pointed out in June, “The sourcing and back-end investment requirements being laid down are worrisome for foreign retailers operating in retail verticals apart from food and grocery, as segments such as apparel and electronics do not require huge back-end investments.”

Third, the condition that many large companies have been objecting to — a requirement to source 30 percent of products sold from small and medium-size businesses in India — has been simplified so that an investment in plant and machinery of $2 million will now be considered part of the 30 percent, provided they are bought within the first five years of opening. However, the earlier investment required was $1 million, and doubling the amount needed to be spent could only make it more complex for some retailers.

A senior government official told WWD that the amendments have been made following several rounds of discussions with global retailers such as Carrefour and Wal-Mart.

Although the $500 billion retail market has slowed from the earlier 20 percent growth, consumption is still high. “We estimate that India’s consumption market will grow approximately 3.6 times in size over the next decade,” said a report, “The Tiger Roars: An In-Depth Analysis of How a Billion Plus People Consume,” released by The Boston Consulting Group and Confederation of Indian Industry in February 2012. “Overall consumption expenditure, estimated at $991 billion in 2010, is likely to grow to $3.6 trillion in 2020.”

Analysts warn that the process will still be slow. Crisil Research pointed out some of the factors, including the “unstable political climate in India, impending the parliamentary elections of 2014, will lead to a delay in investments by foreign retailers.” Crisil’s report also mentioned that it would take some time, perhaps two to three years, “before the retailer can roll out back-end and front-end infrastructure needed for a sizable scale of operations.”

The new rules apply only to multibrand retailing. Monobrand stores are allowed to be wholly owned by overseas firms, although few Western fashion companies have gone into India on their own. The latest fashion brand to enter the market is Michael Kors, which last week revealed plans to open a 1,500-square-foot store in New Delhi’s DLF Emporio. The store will carry Michael Kors Collection ready-to-wear and handbags as well as Michael Michael Kors accessories, footwear, eyewear and rtw.