FDI in retail: MNC retailers to select partners with suitable capabilities

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Economic Times

Paresh Parekh
Tax Partner, EY

India's retail market promises to be among the top retail destinations in the world, thanks to rising consumption.

International brands and retailers will gain access to a substantial market, following Cabinet's decision to allow up to 51% foreign direct investment (FDI) in multi-brand retail sector and 100% FDI in single-brand retail.

FDI in single-brand retail currently is 0.03% of cumulative FDI of around $149 billion from April 2000 to September 2011. The relaxation is likely to result in an increase in FDI in retail sector, especially in greenfield and brownfield investments.

Indian retail market, which was around $220 billion in 2005, is now expected to hit $700 billion by 2015, with a CAGR of about 12%.

Within retail, modern, or organised, retail is growing at a fast clip, with CAGR of about 21%. Though the industry was expected to grow at a much faster rate 5-7 years ago, the actual growth rate was much lower. Lack of retail expertise and experience has been the main reason for this subdued growth.

FDI in retail will pave the way for inflow of technical expertise and knowledge and this, in turn, can boost the overall growth of the industry. The announcement is expected to generate 10 million jobs over three years, without impacting smaller and domestic retailers.

The sophisticated front-end that international players are likely to bring will boost investment in infrastructure by retail players, third-party supply-chain companies and the government. This will improve efficiencies in the supply chain, cut wastage, increase efficiency and bring down consumer prices.

Fact is, farming community in India has shown one of the lowest efficiencies in terms of production. Our productivity in food and agriculture is among the lowest in the world and there is a significant opportunity to raise output, with investment in better farming practices.

FDI in retail will provide the farming community a new support group with a common interest that is expected to give a big push to productivity.