background on FDI retail

source:pib.nic.in
EXISTING POLICY
FDI in Multi Brand Retail Trading (MBRT) is prohibited.
Foreign direct investment (FDI), up to 51%, in the Single Brand Retail Trading
(SBRT) sector, is permitted, under the Government/FIPB route, subject to the fo
llowing conditions:
(a)
Products to be sold should be of a Single Brand only.
(b)
Products should be sold under the same brand internationally i.e. product
s should be sold under the same brand in one or more countries other than India.
(c)
Single Brand product-retailing would cover only products which are branded
during manufacturing.
(d)
The foreign investor should be the owner of the brand
FDI in SBRT was first permitted vide Press Note 3 (2006), dated 10.2.2006.
RATIONALE FOR LIBERALIZATION
Leveraging foreign investment in supply chain infrastructure
Lack of investment in the logistics of retail chain creating inefficiencies in
the food supply chain.
Though India is the second largest producer of fruits and vegetables (about 200
million MT), it has a very limited integrated cold-chain infrastructure, with o
nly 5386 stand-alone cold storages, having a total capacity of 23.6 million MT,
80% of this is used only for potatoes.
Lack of adequate storage facilities cause heavy losses to farmers in terms of w
astage in quality and quantity of produce in general, and of fruits and vegetabl
es in particular. Post-harvest losses of farm produce, especially of fruits, ve
getables and other perishables, have been estimated to be over Rs. 1 trillion pe
r annum, 57 per cent of which is due to avoidable wastage and the rest due to av
oidable costs of storage and commissions.
As per some industry estimates, 35-40% of fruits and vegetables and nearly 10%
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 front-en
d retail, investment flows into this sector have been insignificant.
The consequences of inadequate infrastructure are:
Indian farmer realizes only 1/3rd of the total price paid by the final consu
mer as against 2/3rd with higher degree of retail. A World Bank Study of 2007 d
emonstrates that the average price a farmer receives for horticulture produce is
barely 12 to 15% of what is paid at the retail outlet.
An 11th Plan working group has estimated a total investment of Rs. 64,312 cr
ores in agricultural infrastructure. A storage capacity gap of 35 million tonne
s has been assessed, requiring an estimated investment of Rs. 7,687 crores durin
g the 11th Plan.
Bringing supply chain efficiencies
Foreign retail majors have gained decades of experience, technologies and manag
ement practices which will ensure supply chain efficiencies.
Medium-term impact on regulating food inflation
The opening up of Multi Brand Retail will also have a salutary impact on food i
nflation as it would contribute to savings to the food which perishes on account
of inadequate infrastructure.
Securing remunerative prices for the farmers
In the present dispensation, there is a complex chain of procurement involving
several middlemen. FDI in retail will create the enabling environment and it is
expected that progressive States will undertake gradual reform of APMC Act whic
h will ensure direct procurement, at least of horticultural produce from farmers
to enable them secure remunerative price.
Employment opportunities
Huge investments in the retail sector will see gainful employment opportunities

in agro-processing, sorting, marketing, logistic management and the front-end r

etail business.
Industry estimates suggest employment of one person per 350-400 sq.ft of retail
space, about 1.5 million jobs will be created in the front-end alone in the nex
t 5 years. Assuming that 10% extra people are required for the back-end, the di
rect employment generated by the organized retail sector in India over the comin
g 5 years will be close to 1.7 million jobs. Indirect employment generated on t
he supply chain to feed this retail business will add millions of jobs.
MULTI-BRAND RETAIL FDI POLICY IN OTHER COUNTRIES
S.No.
Country
FDI Limits
Benefits
Remarks
1.
China
100%
First permitted in 1992 with foreign ownership restricted to 49%, progressivel
y lifted and now no restrictions.
Over 600 hypermarkets opened between 1996 and 2001
The number of small outlets (equivalent to kiranas ) increased from 1.9 million t
o over 2.5 million
Employment in the retail and wholesale sectors increased from 28 million peopl
e to 54 million people from 1992 to 2001.
Impressive growth in retail and wholesale trade.
2.
Thailand
100%

Referred to a country where FDI had an adverse effect on the local retailers.
Has a limited capital requirement for retail and wholesale outlets.

Growth in agro processing industry.

3.
Russia
100%

Supermarket revolution took place in 2000s.

Heavy growth registered.

4.
Indonesia

100

Modern retail took off in 1990s.

No limit on number of outlets
Matahari is leading chain.

5.
Brazil, Argentina, Singapore & Chile allow 100% FDI in retail sector while Malay
sia permits FDI to a certain limit.
Cabinet decision
To permit FDI in MBRT in all products, in a calibrated manner, subject to the fo
llowing conditions:
FDI in Multi Brand Retail Trade (MBRT) may be permitted up to 51%, with Governm
ent approval;
Fresh agricultural produce, including fruits, vegetables, flowers, grains, puls
es, fresh poultry, fishery and meat products, may be unbranded.
Minimum amount to be brought in, as FDI, by the foreign investor, would be US $
100 million.
At least 50% of total FDI brought in shall be invested in `backend infrastructu
re`, where back-end infrastructure will include capital expenditure on all activit
ies, excluding that on front-end units; for instance, back-end infrastructure wi
ll include investment made towards processing, manufacturing, distribution, desi
gn improvement, quality control, packaging, logistics, storage, ware-house, agri
culture market produce infrastructure etc. Expenditure on land cost and rentals
, if any, will not be counted for purposes of backend infrastructure.
At least 30% of the procurement of manufactured/ processed products shall be so
urced from `small 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 i
n time, this valuation is exceeded, the industry shall not qualify as a `small i
ndustry` for this purpose.
Self-certification by the company, to ensure compliance of the condition as abo
ve, which could be cross-checked as and when required. Accordingly, the investor
s to maintain accounts, duly certified by statutory auditors.
Retail sales locations may be set up only in cities with a population of more t
han 10 lakh as per 2011 Census only 53 cities qualify for FDI in multi-brand ret
ail out of nearly 8000 towns and cities and may also cover an area of 10 kms aro
und the municipal/urban agglomeration limits of such cities; retail locations wi
ll be restricted to conforming areas as per the Master/Zonal Plans of the concer
ned cities and provision will be made for requisite facilities such as transport
connectivity and parking.
The FDI in multi-brand retail is being opened in 53 cities only with population
of 1 million and for the rest of the country, current policy regime will apply.
In the current regime, 100% FDI is allowed upto wholesale cash and carry point
from which franchise/small retailers are able to source quality products for sa
le to the public at large.
Government will have the first right to procurement of agricultural products;
To permit 100% FDI in single brand retail trading, subject to the following cond
itions:
FDI in single brand retail trading may be permitted up to 100% with Government
approval;
Products to be sold should be of a Single Brand only.
Products should be sold under the same brand internationally i.e. products shou
ld be sold under the same brand in one or more countries other than India.
Single Brand product-retailing would cover only products which are branded during

manufacturing.
The foreign investor should be the owner of the brand.
In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatoril
y have to be done from SMEs/ village and cottage industries artisans and craftsm
en. `Small industries` would be defined as industries which have a total investm
ent in plant & machinery not exceeding US $ 1.00 million. This valuation refers
to the value at the time of installation, without providing for depreciation. Fu
rther, if at any point in time, this valuation is exceeded, the industry shall n
ot qualify as a `small industry` for this purpose. The compliance of this condit
ion will be ensured through self-certification by the company, which could be su
bsequently checked, by statutory auditors, from the duly certified accounts, whi
ch the investors will be required to maintain.
Condition of 30% sourcing from small scale sector
30% sourcing is to be done from micro and small enterprises which can be done f
rom anywhere in the world and is not India specific. However, in this case, it h
as been stipulated that 30% sourcing will be done from micro and small enterpris
es having plant and capital machinery worth US 1 million.
This condition will ensure that our SME sector, including artisans, craftsman,
handicraft and cottage industry benefits, especially in sectors like textiles, g
ems and jewellery, leather and jute.
This condition is applicable both for Multi-brand retail in all cases and for si
ngle brand retail in cases where foreign equity exceeds 51%.
apprehensions
Rationale for enhancing FDI ceiling to 100% in single brand retail trading.
In the last 5 years, under the current regime of 51% FDI in single brand retail,
foreign direct investment of only US$ 44.45 million have been received, constit
uting barely 0.03% of total FDI inflows. Globally, single brand retail follow a
business model of 100% ownership and global majors have been reluctant to estab
lish their presence in a restrictive policy environment. The current cap of 51%
confers a right to pass all ordinary resolutions, while enhancing cap to 100% w
ill confer full ownership and control.