Last week the Indian Government cabinet decided to further open up India's burgeoning retail sector to foreign investors.Although much of the media discussion has centred around supermarkets, there is also a significant opportunity for brands seeking to establish retail outlets in the world's second most populous country.

The latest proposed reforms will allow:

  • foreign direct investment (FDI) up to 51 per cent in multi-brand retail subject to certain minimum investment conditions:
    • minimum investment of US$100 million, 50 per cent to be invested in back-end areas - transport, storage and other infrastructure
    • at least 30 per cent of produce sourced would have to come from small or medium-scale industries
    • stores can only be in cities where there are more than one million people
  • up to 100 per cent FDI in single brand retail.

The proposed reforms follow earlier reforms introduced in 2006 that allow foreign retailers to invest up to 51 per cent in single-brand retail and up to 100 per cent in wholesale and cash-and-carry businesses.FDI in multi-brand retail is totally closed to foreign investors.

What the changes mean

Although the policy detail is yet to come, it would appear that the proposed changes will mean multi-brand foreign retailers will be able to partner with Indian companies to own and operate retail businesses in India, provided they comply with the minimum investment conditions. This will be attractive to large-scale foreign retailers, such as supermarkets and department stores, and to multi-brand foreign retailers that are currently restricted to operating wholesale businesses in India.

For single-brand foreign retailers, the proposed change allowing 100 per cent FDI (up from 51 per cent) will mean that those retailers can fully own and operate retail stores selling their single-branded products. In addition to benefiting corporate retail chains, this development will benefit franchise systems seeking to prove their concepts in the market prior to commencing franchising.

The reforms are aimed at increasing competition, improving efficiency in India's fresh food supply chain, improving the livelihood of India's farmers and reducing inflation.

Obstacles to reform

Liberalisation of the retail sector has been, and still is, a sensitive issue in India. There have been widespread fears that the entry of foreign retailers will severely impact India's small retailers that dominate the sector. Since the proposed reforms were announced, there have been raucous scenes in parliament, with opposition political parties demanding a "roll-back" of the decision and stalling parliamentary proceedings. Several Indian state governments have also said that they will not permit global chains to operate in their cities.ÿHowever the supermarket chains have been the primary focus of the protests.

It remains to be seen whether the Congress Party led Government will have the political will and necessary support to implement the reforms. Given the lack of policy detail and the political backlash caused by the proposed reforms some foreign retailers are taking a "wait-and-see" approach at this stage. However the extension of the single-brand percentage from 51 per cent to 100 per cent is not anywhere near as contentious as the multi-brand decision, and the changes may be a timely signal to foreign retailers to step up their preparatory efforts.

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