Investment Opportunities in India

March 20, 2013

Indian retail market opened more doors for NRIs

The recent wave of reforms by the Government to incentivise foreign direct investment (FDI) in various sectors is bringing a new zeal to the investment options in India. One of the most debated reforms is the policy for allowing 51 per cent FDI in multi brand retail.

Retail Market in India

The Indian retail industry has experienced growth of 10.6 per cent between 2010 and 2012 and is expected to increase to US$ 750-850 billion by 2015. Food and Grocery is the largest category within the retail sector with 60 per cent share followed by Apparel and Mobile segment.

Within the organised retail sector, Apparel is the largest segment. “Food and Grocery” and “Mobile and telecom” are the other major contributors to this segment.

Evolution of the FDI policy in multi brand retail

The Government of India had been considering opening up the multi brand retail sector to FDI for some time. They had released a discussion paper in 2010 on the topic and had extensively gathered public, academic and industry views on the issue. In November 2011, the Government came out with its proposal for the new FDI policy. However, unable to achieve political consensus on the issue, they had to shelve their plans for the enactment of the policy. Finally, the Government decided to pass the new FDI policy on multi brand retail in September 2012 to increase investment options in India.

The FEMA notification issued by the Reserve Bank of India permitting FDI in the retail sector was laid before the Houses of Parliament and the same has been cleared without any modification.

The changes in some of the policy conditions indicates government intention to attract more NRIs to invest in retail sector of India and provide a window to foreign retailers to cultivate/ grow the SME segment.

Policy Implications

The FDI policy conditions will have a different impact on the various sub-segments of the retail industry in India. A policy condition might have a low impact in one segment but could be a major stumbling block for another segment. Implications of each FDI policy condition in Mass Grocery, Apparel and specialty stores such as Beauty & Wellness and Consumer Electronics are:

  • Minimum FDI of US$ 100 million: Minimum FDI of USD 100 million and a constraint of maximum 51 per cent stake of the foreign entity imply that the minimum investment required by both, the foreign and the Indian partner together, is more than Rs 1000 crore
  • 50 per cent of FDI in backend infrastructure in three years: Minimum investment of Rs 220 crore-Rs 250 crore is to be invested in backend infrastructure in the first three years to invest in retail sector of India. However, different retail segments have dynamic requirements of backend infrastructure
  • 30 per cent of sourcing from “small” industries: This policy constraint implies that retailers should have at least 30 per cent sales from private label brands or unbranded products sourced from small industries

Policy conditions of 50 per cent investment in backend and 30 per cent sourcing from small industries are the two most difficult conditions to be met for FDI in multi brand specialty retail such as Consumer Electronics, Beauty & Wellness etc.

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November 23, 2012

Major Government initiatives and investments in Retail Industry of India

Retailing in India is one of the pillars of its economy and accounts for 14 per cent to 15 per cent of its gross domestic product (GDP). The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail markets in the world, with 1.2 billion people.

Indian retail industry, considered as a sunrise sector, offers huge growth potential. The sector is expected to grow almost three times its current levels to US$ 660 billion by 2015, according to Investment Commission of India.

The foreign direct investment (FDI) inflows in single-brand retail trading during April 2000 to June 2012 stood at US$ 42.70 million, according to the latest data released by Department of Industrial Policy and Promotion (DIPP). Cash and carry represents an opportunity worth around Rs 8,250 billion of the Rs 27,500 billion annual retail businesses in India.

Major Investment in Indian Retail Sector

Some of the major investments in Indian retail sector are as follows:

  • Max Hypermarket India has partnered with French retail giant, Auchan Group to open franchise hypermarket stores in India. The existing stores of Max Hypermarket will be rebranded as ‘Auchan’ and shall operate under a franchise agreement. Max Hypermarkets and Auchan plan to open 12-15 new stores in a year across various geographies in India
  • Sahara India plans to enter the retail sector and will invest Rs 3,000 crore (US$ 542.50 million) initially to set up the business. The company will start its retail business under the ‘Q’ brand name and plans to expand its reach in nearly 1,000 cities and towns by 2013
  • BhartiWalmart plans to invest Rs 104 crore (US$ 18.81 million) in expanding its outlets across the country. In all, BhartiWalmart has about 17 stores in India

Government Initiatives

The Government of India is playing a vital role in making the Indian retail industrythe most lucrative for non-resident Indians (NRIs) and person of Indian origin (PIOs). Some of the major initiatives by the Government are as follows:

  • The Government of India has allowed 51 per cent foreign direct investment (FDI) in multi-brand retail and 100 per cent FDI in single-brand retail
  • DIPP is likely to consider relaxing the sourcing norms for global retailers to establish shops in India, as IKEA is asking for further relaxation of mandatory conditions
  • The Union Ministry of Finance has provided relief to the Rs 18,000 crore (US$ 3.25 billion) software industry by replacing a multi-level structure of tax deducted at source (TDS) on distributors with a single TDS. This would be deducted by the first distributor—one who directly purchases packaged software from a developer

The federation has welcomed the new FDI in retail announced by the Government of India. The Government has announced its decision to allow 51 per cent FDI in multi-brand retail and 100 per cent FDI in single-brand retail. In addition, the Government has also opened up the aviation sector and put up four PSUs for disinvestment.

The ISF said that FDI in retail sector will have a much wider impact on organised employment as compared to what happened in the IT sector over a decade ago. The federation also said that these measures will open doors for low-skilled people.

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