While the government’s approval for 51% foreign direct investment (FDI) in multi-brand retail will strengthen back-end infrastructure benefitting farmers and consumers, the amendments in the policy framework for 100% FDI in single brand retail will help cottage industries grow, says Care Ratings in its report.
Last week’s announcements by the government leaves the final decision for the roll out of foreign retail outlets in different parts of the county on respective states. So far only 9 states and 2 union territories out of respectively 28 and 7 have welcomed the foreign retailers through the FDI route while others have opposed citing loss to local retailers.
As per the government guidelines, within three years of the induction of the FDI at least 50% of total investment shall be invested in back-end infrastructure by the foreign retailer in the country. This would include investment in processing, manufacturing, distribution, quality control, packaging, logistics, storage, warehouse etc.
“The compliance to the said investment clause would lead to lower returns to the retailers in the short-term owing to half of the investments being made in ‘back-end retailing activity’; the returns of which are generally visible with a lag effect,” said the rating agency in its report. However, in the long run the efficiency of supply chain infrastructure will bring down the cost of retailing.
The single brand retail which failed to attract investment due to policy framework despite government’s allowing 100% FDI in January this year, is now expected to help small and medium enterprises besides cottage industries artisans as 30% souring is mandatory for all the FDI beyond 51%.
“The advent of greater number of foreign retailers and correspondingly higher sourcing requirements owing to growth in their sales volume would correspondingly lead to new capacity build -up or up gradation of existing capacities of the MSMEs,” said the report.
