Walmart’s backdoor entry into Indian retail

Walmart’s backdoor entry into Indian retail

This photo taken on May 8, 2018 shows the logo of e-commerce company Flipkart at its headquarters in Bangalore. US retail behemoth Walmart is expected to announce May 9 that it is to buy a majority stake in India's largest e-commerce company Flipkart for

Walmart, the $500 billion retail giant, has acquired 77% stake in Flipkart, a leading Indian brand in e-commerce segment, with an investment of $16 billion. The balance 23% will be with minority investors, including Alphabet (a subsidiary of global internet giant Google) which will invest $1.5 billion.

Walmart is not new to the Indian market. It came to India initially in 2007 in the “wholesale cash and carry” business viz sale to wholesalers and other bulk buyers (including institutional agencies) under a joint venture (JV) arrangement with Bharti Retail. This was under the then FDI (foreign direct investment) policy which allowed foreign investor 51% stake in this business.

In 2012, the then UPA-II government liberalised the policy to allow 100% FDI in the wholesale cash and carry business. It also permitted 51% FDI in multi-brand retail (MBR) or the so-called brick-and-mortar. But, this was subject to several restrictions such as minimum investment of $100 million (50% of this should be in building back-end infrastructure), investor sourcing 30% of the requirements locally from small and medium enterprises (SMEs) and prior approval of the state government.

In the run-up to the discussion on the policy for FDI in retail and in the hope that a conducive policy would be put in place, Walmart was seriously contemplating entry into MBR in a JV with Bharti Retail Limited (BRL). But that was not to be. The 2012 policy permitting 51% FDI in MBR came with a plethora of riders (see above) which tantamount to micro-managing the initial investment and subsequent operations. That acted as a spoiler.

As a result, the retail giant put the idea of getting into MBR on hold and decided to focus wholly on cash and carry wherein the government had cleared the way for 100% FDI. In 2013, it exited the JV with BRL as the very reason d’être for which it had entered into a collaborative arrangement with the local partner was not served.

Since then, there has not been much change in the policy for FDI in MBR except that in the budget for 2016-17, the government announced 100% FDI in food retail — both offline and online. However, such investment was subject to the retailer selling only food procured from farmers in India and processed locally and undertaking investment in back-end infrastructure.

The policy on FDI in food retail may have enthused the likes of Amazon which was given approval last year, but the riders continue to haunt foreign investors. The requirement to sell “locally” produced food forecloses the import option. A further condition that foreign retailer cannot sell any item other than food takes away the flexibility to improve margin which in food business per se are limited (the idea of letting them keep non-food items too has not found favour with the government). The obligation to invest in back-end infrastructure in agriculture makes matters worse.

‘Market-place’ model

What then has resurrected Walmart’s interest in India? This has a lot to do with the guidelines notified in 2016-17 to allow 100% FDI in the so-called “marketplace” model for e-commerce — an IT platform where sellers and buyers conduct transactions. The permission is subject to conditions, such as not more than 25% sale by a single vendor, no advertisements or discounts etc. In an “inventory” based model where the company also owns the stock of goods, FDI is prohibited.

The “marketplace” model per se is not such a big attraction. Here, all that a company gets is a fee for offering its services. However, the real meat is in direct selling where FDI is barred. Yet, the likes of Flipkart have shown the way to circumvent the policy. A company engaged in direct selling can easily camouflage its activities under the “marketplace” through clever documentation, for example by showing that it does not own the stock. The riders on entities to qualify for marketplace are meant to prevent misuse but those are rarely complied with.

The above arrangement is as good as permitting 100% FDI in MBR. Under it, any quantum of FDI can be brought in without any riders — there being no conditions appended to foreign investment in marketplace. It is precisely this that carries an enormous appeal and that is why Walmart is making a full throttle entry.

This may be a win-win for both the government and the foreign investor; the former because the country gets access to FDI without having to displease the domestic constituency (read: mom-and-pop or so-called ‘kirana’ stores) and the latter because it gets access to the vast Indian retail market which is worth $500 billion and is still growing at a fast pace. But, it is unfair and lacks transparency. It allows FDI in MBR through the back door.

The government should clear the policy maze by doing away with all sorts of artificial distinctions in its FDI policy. It should permit 100% FDI in MBR for all sectors (there is no logic in restricting this to food) irrespective of whether it is online or offline and without any riders. With such a uniform and non-discriminatory policy in place, several MNCs (not just Walmart or Amazon) will come in droves and also invest substantially in handling, storage, transportation and quality assurance, even as they see opportunities for growth.

Giving them a free hand should be seen in the larger perspective of removing the inefficiencies in existing supply and distribution chain, reducing cost and improving the competitiveness of products in almost all the sectors.

In food alone, it would be possible to save about Rs 1,00,000 crore annually by stemming wastage of agricultural products, that currently happens due to lack of storage and transportation facilities. This, in turn, will help offer a better deal to millions of farmers and achieve the avowed goal of doubling their income. Can we expect a call on this at least in 2019?

(The writer is a New Delhi-based policy analyst)