Reforms mooted for Indian retail

06 July 2009

NEW DELHI: India's government may loosen the rules restricting foreign direct investment in the national retail market, encouraging multinational operators to provide funding that could accelerate the development of the sector in the country.

Consumer spending levels in India have slowed as shoppers cut back due to rising inflation and limited credit, while development costs are also prohibitively high for many domestic retailers.

The current rules do not allow foreign firms to sell directly to consumers, although they are permitted to form partnerships with local chains, albeit with a stake limited at 24%.

As such, companies such as Wal-Mart have been forced to adopt an alternative approach, such as opening wholesale outlets.

While these limitations are not currently under review, provisions in the government's recent Economic Survey suggested that  restrictions could be lifted when it comes to infrastructural spending.

The report considers allowing "FDI in multi-format retail, starting with food retailing. Initially this could be subject to setting up a modern logistics system, perhaps jointly with other organised retailers."

"A condition could also be put that it must have (for 5 years say) wholesale outlets where small unorganised retailers can also purchase items (to facilitate transition)," the study continued.

The Economic Times argued the food category was chosen as the first sector to experiment with such an initiative as the “efficient supply chain” is less developed than categories like FMCG and apparel.

Pinakiranjan Mishra, partner and industry leader, retail, at Ernst & Young said allowing foreign investors to take a bigger stake in Indian firms may prove more productive in the long-term.

“This would be good news for large foreign retailers who have entered India with the cash and carry model and plan to get into retail,” he said.

Data sourced from Economic Times; additional content by WARC staff