Expected impact of FDI in Retail – Ernst & Young India Viewpoint
The Union Cabinet has approved 51% FDI in multi-brand retail and raised the cap on FDI in single-brand retail from 51% to 100%. Partner & National Leader - Retail and Consumer Products, Pinakiranjan Mishra, and Partner - Tax, Paresh Parekh, share their views on this development.
- Growth of the Retail sector in India - Improvement in Retail capability building
About 5-7 years back, the industry was expected to grow at a much faster rate than what it actually has. Lack of retail experience & capability has been one of the primary reasons for this subdued growth. FDI in retail will make way for inflow of knowledge from international experts which can give boost to the overall growth of the industry. Capability building apart from financial investments is extremely important for the industry.
- Push to Infrastructure - Improvement in management of supply chain
FDI in retail will boost investment in infrastructure from the retail players, 3rd party supply chain companies as well as the Government in the back of a sophisticated front end that international players are likely to bring. This will improve the efficiency of the supply chain, which will bring down the wastage, increase efficiency and reduce the overall cost to the consumer
- Push to productivity - The Farming Community in India
Our productivity in food & agriculture is one of the lowest in the world and there is a significant opportunity for up-liftment of output with investment in better farming practices. FDI in retail will mean that the farming community will have a new support group with a common interest which is expected to give a great push to productivity.
The above views are shared by Pinakiranjan Mishra, Partner & National Leader - Retail and Consumer Products, Ernst & Young India.
Likely impact if there is relaxation of FDI policy in Retail
- Single brand
This is a welcome step. FDI investment in single brand retailing till now has just been 0.03% [Rs 204 cr / usd 44 mn] of total FDI investments from April 2000 to September 2011. This relaxation is likely to result in increase in FDI in retail sector, by way of either new foreign entrants, or buy outs / increase in stake / M&A amongst existing single brand JVs with foreign partners. We could also potentially see present licensing / distributor / franchise arrangements being converted to either JVs with respective foreign retailer / brands, or, foreign retailers completely buying out the Indian licensee / franchisee / distributor.
- Multi brand
This is a welcome and historic step. This is likely to result in increase in investments and growth in Indian retail sector, which is ranked amongst the top retail destinations in the world. Besides new entrants / joint ventures, this could also result in combination of existing cash and carry operations of foreign players with retail operations of Indian retailers, or, foreign retailer acquiring stakes in existing Indian retail entity. Also, this could provide further options to existing Indian retail chains / groups to raise long term capital for expansion and maybe to attract partnerships with some global players. Also, foreign multi brand retailers, who did not want to enter India through cash and carry operations, may now explore Indian presence by having stake in Indian retail company
The above views are shared by Paresh Parekh, Partner - Tax, Ernst & Young India.