Of FDI policy, legal changes and retail giants

On August 28, 2019, the government somewhat eased the Foreign Direct Investment (FDI) policy in single-brand retail by expanding the definition of the mandatory local sourcing norms. It also allowed retailers to have an online presence without the requirement of having brick and mortar stores.

However, much to the dismay of foreign retailers and Confederation of Indian Industry, the Cabinet has again left the crucial issue of foreign investment in multi-brand retail unaddressed.

Retail history in India has seen its share of ups and downs. In the face of the FDI regime and the related legal framework, foreign retailers face an adversary far tougher to overcome than their Indian competitors. The 51% cap on FDI in multi-brand retail was here to stay and the policy uncertainty in multi-brand retail continues.

The Indian market is huge, so probably the next logical step for Walmart given that with regards to offline stores its hands were tied due to FDI norms, was the acquisition of Flipkart. With that, Walmart gets a big chunk of e-commerce, the access to a very penetrative logistics network, and a say in the offline stores of Flipkart-owned Myntra and many others that might come up in the future.

Indirectly, Walmart also gets control over PhonePe, India’s second-biggest digital payment app. This is the true big billion game. When all this is coupled with the wholesale stores that Walmart already operates in India, it can with great ease combine its payment app, offline retail stores, wholesale stores, and flipkart.com into one big seamless marketplace with potentially no rival around, which is worrying the government and local traders.

Speaking of dominance, FDI is not the only cat to be tamed for Walmart and others. Indian law strongly discourages monopolistic setups. The Confederation of All India Traders (CAIT) is already in loggerhead with Walmart over its apparently anti-competitive deal with Flipkart, with allegations like predatory pricing.

Another appeal has been admitted by NCLAT on abuse of dominant position by Flipkart and Amazon. But any decision from NCLAT should keep in mind the FDI changes made in February this year that prohibit online retailers from creating an unfair marketplace that offers steep discounts. There are already enough fetters on the big retail players.

A prudent solution seems to be that the government should go easy on the retail world. One of the biggest arguments against opening up multi-brand retail to foreign companies is that it will take away jobs or destroy local kirana stores.

This argument looks as farfetched as the ones that were held up against liberalising the economy in 1991. Time has proven that this has been good for India, and we have commercial precedence in both the USA and India that multi-brand stores and kirana stores can thrive simultaneously. There are other advantages of opening up the multi-brand retail sector like passing over technological knowhow and spreading global best practices.

The government can make provisions for a certain percentage of goods sold to be procured locally. These retailers would invest in back-end supply chain networks and may be asked to penetrate the hitherto untapped urban and semi-urban areas.

New real estate would come up which will create construction work and jobs, and we are talking about thousands of stores across India and each of these stores once built would require huge manpower to run. As a further bolstering move, these retailers may be asked to maintain an investment fund to be used to teach business technicalities to Indian sellers.

Further, they can be made to sign on low retrenchment clauses so that labour rights are not violated, and they continue to provide employment to the greatest number possible. The government can ask the retail companies to index tribal artwork and handicrafts from remote villages on the homepage of their websites and provide free deliveries and other concessions.

Recently, Amazon declared that it will sell products from the Tribal Cooperative Marketing Development Federation of India on its global marketplace.

Silver linings

Walmart-Flipkart’s keen interest in micro and small-medium enterprises and their commitment to Uttar Pradesh’s “One District One Product” project which seeks to promote traditional art, are some of the other silver linings which tell us that further opening the market can actually be a good thing.

India should look like an economy that encourages wealth creators and investors and not make them run away as the recent budget was quite successful in doing.

The stand that deals like Walmart-Flipkart will cause an adverse impact on competition does not seem to be well-founded as the CCI has clearly said that the combined market share of the parties will be less than 5% which is not a threatening level at all.

Similarly, there is no reason for local traders and the government to be wary of the other big retail players. If the above steps are followed, perhaps allowing 100% FDI in multi-brand retail might not be a bad idea.

India being a booming market, retailers are definitely making hay but as long as the consumers are winning and the economy prospers, we shouldn’t mind this big billion game.

(The author is a lawyer and former attorney with Luthra and Luthra Law Offices)