India has tweaked its foreign direct investment policy in single-brand retail trading (SBRT) by allowing foreign players to have 100% stake under the automatic route. Earlier too, we had opened the door for 100% FDI in SBRT, but a government approval was needed beyond 49%. So, what has substantially changed from then to now?
Nothing in terms increasing or lowering stakes. It is only in terms of enhancing the ease of doing business that this part of policy change concerns itself. But much of the initial criticism has come only on this part. Political parties and trade organisations have been saying that multinationals will overpower small Indian retail, as if 100% entry of MNCs through the government route would not have overpowered them!
Albeit, there is a second part of the new policy which was announced late last week. That is, the government has relaxed the local sourcing norms for the retail traders of single brand. A policy of 30% mandatory sourcing from local market, which was earlier in place. Now it has been relaxed for five years and has been replaced by easier sourcing norms for non-resident companies. Not much attention has been drawn to that till now. Be that as it may, there can be two ways of looking at things. One, allow foreign participants and increase competition in the domestic market so that the home-grown retail too modernises itself, and second, is to let the domestic retail business grow in a close circuit without much technological advancement or capital expansion.
Opening of the retail sector in India has always been gripped with fear. That is of killing small businesses and rendering a million people unemployed in the name of giving jobs to a thousand. That prima facie appears genuine, but one of the world's largest audit companies KPMG's findings on China has something different to offer. It has said that in China, the opening up of retail to foreign participants increased employment to the extent of 3% in less than 10 years in that sector. As many as 26 million new jobs were created after China went for retail FDI reforms. During the same time home-grown retailers too grew by 30%.
$1.1 trillion market by 2020
According to an industry estimate, the retail market in India is likely to reach $1.1 trillion by 2020, from the current level of $680 billion. A recently published study jointly by MRRSIndia.com and Assocham has suggested that Indian consumers have adopted new technologies and thus fundamentally modified the structure of demand. This demand is shaped by factors such as, noticeable shift in demographics with rising income middle-class, rise in number of smaller towns entering consumption bandwagon, emergence of new channels like ecommerce, proliferation of the internet connectivity and demand driven by digital media.
It said that decoding these consumption patterns would be critical for companies to realign themselves and build new capabilities. To be $1.1 trillion industry in just two years from now, certainly demands new kind of investment.
The latest report of the United States Department of Agriculture (USDA) has said that India's food and grocery retail business is estimated at $380 billion, out of which, the modern food retail sector is 2%. Though food retail is still dominated by traditional mom and pop shops, modern retail and supermarkets are slowly making their entry.
Another report by Euromonitor has brought out more interesting findings. It says that India's food retail has grown after 2016, riding on the sudden demonetisation of November 2016, which led to a consumer shift away from cash purchases at kirana shops towards electronic payment options first at organised retailers.
Besides, India is going through a process of transformation. New reforms like Goods and Services Tax, demonetisation, power sector revamp, doubling of farmers' income, capacity expansion in manufacturing sector, and the likes have increased the need for more resources in the hands of government.
In other words, India is modernising and traditional ways of doing business may lose their relevance sooner than later. The government needs to take care of small traders and hand-hold them to an extent possible, but the debate is raising by the day on whether the government should be in the business of running businesses.
Prime Minister Narendra Modi has tasted the waters. His style of reforms and policy revamp have earned him rating upgrades by the World Bank and an international credit rating agency. And those who have not immediately handed him accolades, have at least exuded confidence that steps taken by him will take India forward in the right direction. This has bolstered his faith in himself and there is a little chance of going back from where he is now. He firmly believes that the latest tweaking in SBRT will push economic growth and bring more jobs in India.