Allowing foreign firms free play in India’s retail sector has always been a political hot potato. The Government has therefore been opening up this sector to foreign players in baby steps. The latest was allowing 100 per cent Foreign Direct Investment (FDI) in single-brand retail trading through the automatic route last week.
What is it?
Earlier, foreign players could own up to 49 percent in a local single-brand retail chain but had to approach the department of industrial policy and promotion (DIPP) for a go-ahead to acquire the remaining 51 percent. Now they can fully own their Indian operations without applying for permission.
What’s a single-brand retail chain?
It is expected to sell all its products under only one label across its stores. Think Levi’s, Starbucks or Ikea. A multi-brand retail store is like your typical Big Bazaar which sweeps many brands under one roof.
- The new concessions apply only to single-brand retail chains. FDI in multi-brand retail trading in India is still capped at 51 percent.
- If an MNC operates a single-brand retail chain, the product must also be sold under the same brand name globally.
- The MNC must also source 30 percent of its purchases for the business from India. This rule was slightly relaxed last week to allow an MNC to set off any local sourcing for its global business, against this 30 percent quota.
Why is it important?
- Apart from bringing the much-needed investment to India, it is expected to create employment at the local level.
- The new proposal is a compromise solution which tries to protect mom-and-pop outlets while earning the Government brownie points for liberalising FDI.
- The policy allows the Government to test the waters on how MNC presence affects Indian retailers. Given that many of the global single-brand retailers vend only premium or luxury goods, it was also hoped that their India foray won’t impact the mom-and-pop stores much.
- The move may also help home-grown single brand e-tailers like Urban Ladder source more foreign venture capital to bankroll their expansion.
- Those opposed to FDI worry that opening the door to MNCs will draw away consumers from the tiny outlets to giant departmental stores, and squeeze their suppliers too.
- MNCs can sell both premium and mass-market products in these single-brand stores.
- Given that all retailers essentially compete for a share of the same consumer’s wallet, spending on premium products or services can come at the cost of splurging on mass-market products. Example – One trip to Starbucks may equal your monthly bill at the local tea stall.
If you are a shopaholic with a yen for Louis Vuitton bags, Ikea furniture or Cartier watches, you may soon see more swanky stores exclusively for such brands. Single-brand retailers can offer new experiences too. But if you feel sympathy for your neighbourhood mom-and-pop store, you can thank your stars that 100 per cent FDI in multi-brand retail isn’t yet a reality.
The government has opened 100 per cent Foreign Direct Investment in single-brand retail. Thankfully, it remains opposed to the same in multi-brand retail which may eat up local mom-and-pop stores, but this recent move too is not as good or bad as it seems. Let us look how.
Recently, the government has shifted its focus to the retail sector as it is believed that it has the potential to create jobs in India. Examine the recent initiatives taken by the government and how it affects the economy as a whole.