FDI tonic

The government’s green signal for up to 51 per  cent foreign direct investment (FDI) in multi-brand retail ventures and up to 49 per cent FDI  inaviation companies are good feelers overall for investors in the short to medium term.

Real estate developers and infrastructure service providers who have been going through rough times since the market crash of December 2008 are thrilled by the move, as are large multi-brand players like Walmart, Tesco and Carrefour who might re-examine their plans for front-end retail operations in India. However, it would be premature to expect the move to result in a stampede by retailers to set up shop in India. After the government allowed 100 per cent FDI in single-brand retail last year, only two applications -- from IKEA and Pavers -- have been received by the Foreign Investment Promotion Board so far.

Nonetheless, the dismal state of FDI despite borrowing costs falling with successive interest rate cuts by RBI, makes out a strong case to boost direct investment flows into key sectors. Under pressure to accelerate the reforms process, the UPA government has gone out of the way to accommodate the concerns of mega retailers; for a start, by discarding its sourcing clause stipulating 30 per cent sourcing by foreign multi-brand retailers from local small and medium enterprises.

The UPA government appears to have bent backwards to please the multinationals eager to set shop in India. Unorganized kirana-centric retail accounts for between 85-95 per cent of total food, grocery and FMCG products sold in states like Uttar Pradesh, Rajasthan, Kerala and West Bengal. State governments like Karnataka, Bihar and Uttar Pradesh have always viewed big retail as inimical to the interests of their vast kirana store networks numbering into lakhs. However, their fears could be far-fetched as there are only 53 cities in India as per census records with populations of 1 million or more where multi-brand retailers can set up super/hypermarkets.

Even an exaggerated guesstimate of 20-30 new hypermarkets in each of these cities would cause minimal displacement for the thousands of kirana stores in each city. Besides, kirana store employees moving to hypermarkets would be eligible for insurance and provident fund benefits. To some extent, the success or failure of the FDI story would be analogous to the number of kirana stores getting displaced, and these will still run into the thousands. The government needs to address these fears to make the FDI entry a success, especially since the states have been given a veto power.