Clarification on FDI in retail: A dream-buster

While the clarifications on retail will genuinely promote FDI, the existing players don't have much to look forward to

The best way to judge the impact of a policy decision is to track the comments of stakeholders. If it has benefited or affected them moderately, they would be giving good amount of sound bytes on it. But if it hits them where it hurts most, it often makes them speechless. The general comment across stakeholders then would be, “We are studying the policy.”

This is exactly what has happened with the recent clarification announced by the government on foreign direct investment (FDI) in retail. Both big foreign retailers as well as existing Indian ones have suddenly lost their voice. Probably for the first time in nine months, when FDI in retail was cleared by the Parliament, the government has come out with clear statements that will genuinely promote FDI in retail. Till date all clarifications were piecemeal and case specific.

The recent set of clarifications say foreign retailers cannot buy existing stores. So much for the rally in counters of Indian retailers. These companies had welcomed FDI in retail on the only assumption that they would be able to sell a stake in their companies to bigger global retailers. Now they will find them competing against the very guys they wanted to welcome. Naturally they are silent on their comments on the policy clarification.

Further, the clarification says that 50 per cent of the total investment in supermarkets has to be in back-end infrastructure. A company cannot acquire supply chain or back-end infrastructure from existing companies. There would be a collective ‘ouch’ from players such as Star Bazaar (Trent)-Tesco and Bharti-Walmart, where the foreign partners were testing waters by investing and operating the back-end infrastructure with their joint ventures. All four have been quoted as saying they are reviewing the policy and could not comment on it.

There was another clarification on the 30 per cent sourcing norm from small and medium enterprises. It says that the sourced goods should be non-agricultural and should be sold in the new front-end stores and not through acquisition of existing stores. This seems like a very well-thought through clarification which blocks all loopholes of creative selling of Indian goods through up-country or rural stores. On this too, there is complete silence from all participants in the sector. 
There is another clarification: the franchisee model for growth will not be allowed. The government seems to suggest that foreign retailers to bring in their money, if they wish to exploit the Indian market.

The beauty about the clarification is that it seeks incremental and genuine investment in retail. It has to be new and greenfield. 

For those whose taught that India would be a cake-walk after FDI in retail has been cleared by the Parliament, these clarifications are a wake-up call.