Fear of state-level politics keeps retail chains from investing

The state-by-state approval requirement seems to be the biggest hurdle and worry for the chains

Foreign retail chains such as Walmart, Tesco and Carrefour have been demanding changes in the multi-brand policy rulebook for long but are not ready to invest in India just yet even if the government tweaks the norms.

The state-by-state approval requirement seems to be the biggest worry for the chains, irrespective of other conditions getting toned down and foreign direct investment (FDI) cap being raised from 51 to 74 per cent.

Although officials in the department of industrial policy & promotion (DIPP) have indicated there’s a move to relax some of the conditions by moving the Cabinet again, sector representatives, experts and bankers indicated that elections across 11 states/Union territories scheduled for this year and the next, are adding to the uncertainty of the situation. What’s making the retailers nervous is that states cannot only say “yes” or “no” to the retailers, but can also impose additional conditions on the retail chains.

Among the states that are going to polls over the next few months, all eyes are on Delhi, Rajasthan, Andhra Pradesh and Haryana, whose Congress-led governments have supported foreign investment in multi-brand retail. “Foreign retailers may not like to take a risk ahead of those elections, fearing policy reversal in case of a change in government,” said a source. The other poll-bound states are Maharashtra, Madhya Pradesh, Chhattisgarh, Mizoram, Sikkim, Odisha, and Arunachal Pradesh. Maharashtra again is a key state which has backed retail FDI.

According to an investment banker advising foreign clients, apart from the 30 per cent mandatory sourcing from small and medium scale enterprises (MSMEs), international companies have serious concern over the state-by-state nod required for setting up stores, in the backdrop of so many states coming up for elections.

An executive working with an international retailer said the general elections slated for middle of next year would not be much of a worry because the retail FDI policy cleared by the Cabinet is unlikely to be reversed by a new government. However, state-level concerns are weighing on the companies as they fear break in business continuity due to political backlash, he added.

This is true especially at a time when many of these global retail chains were not performing well in their home markets, another industry representative said. “Their ability to invest is much lower now than it was three to four years ago,” he admitted.

However, a bureaucrat downplayed the weightage given to state permissions. “It’s not a risk in most states,” he said, ruling out the possibility of any  new government disallowing retail FDI when it was permitted before.

On whether retailers may decide to invest once conditions on mandatory sourcing from MSMEs and backend investment are relaxed, Arvind Singhal, founder and chairman of Technopak Advisors, said: “Companies are facing multiple constraints which may prevent them from viable business.”

To attract retailers, India should be seen as one country, rather than breaking up the permissions for states to hand out, he said.

Akash Gupt, executive director,PricewaterhouseCoopers , stressed the need for flexibility in sourcing by retail chains in the policy. Once chains start procuring from India, they should be free to distribute that across their wholesale business, retail and exports, he said, recommending that as a desirable change in the guidelines.

But he, too, said that even if sourcing and backend norms are somewhat changed, many retail chains would still wait and watch before putting in their money as state politics situation is not clear.

Gupt, however, added that everybody understands India is an important market and is worth taking a risk for.
MULTI-BRAND RETAIL RULE BOOK

Now:

• The policy states that foreign retailers planning to enter the multi-brand segment would have to invest a minimum of $100 million, with 50 per cent of it in the back-end infrastructure
• The policy allows up to 51 per cent FDI in multi-brand retail, but it does not specify whether FIIs are permitted
• Currently, the retailer must source 30 per cent of the items that it sells in India from ‘small industries’ which have a total investment in plant and machinery not exceeding $1 million.

Changes To Be Sought:

• Guidelines may specify that the 50 per cent of the first tranche of at least $100 million investment over three years should go into backend infrastructure. This will clarify that back-end investment is not in perpetuity but for a fixed period only
• DIPP is likely to seek clarity on allowing FII in the sector
• It also wants to remove the grey areas in sourcing from MSMEs. If after sourcing from an MSME after three years, the unit’s investment mark crosses $1 million, retailers may be allowed to continue sourcing from it