India: Reforming India's Retail And Aviation Sectors And The Opportunities For Overseas Indians

Last Updated: 13 November 2012
Article by Pankaj Singla

The Government of India (GOI) announced series of reforms on 14th September, 2012 in retail, aviation, broadcasting and power exchanges sectors. The GOI announcement was followed by notification from Department of Industrial Policy and Promotion (DIPP) through various press notes issued on 20th September, 2012. The big bang reforms come at the time when India faces the threat of having its credit rating downgraded to junk status. The key changes and the opportunities presented by the policy reforms are summarized below:

Retail:

Liberalization of multi-brand retail (MBR) sector is one of the milestone steps taken in the direction of further liberalization of Indian economy. The GOI has approved foreign investment of up to 51% in MBRT under the government approval route i.e. prior approval of GOI is required. Although the non-resident investors are required to meet with certain other conditions such as minimum investment amount ($100 million), local sourcing requirement (30%), minimum investment in back-end infrastructure and geographical limitations, the move is an important step towards organizing India's largely unorganized retail sector.

Apart from liberalizing MBRT sector, the GOI has also made important changes in the single brand retail trading (SBRT) sector.

As per the revised policy,

  1. It is not mandatory to source from the 'small industries' in order to comply with the 30% local sourcing requirement; and,
  2. Any non-resident single entity, whether owner of the brand or otherwise, can invest in the SBRT sector.

Opportunity for investors and overseas Indians

The retail sector in India is expected to grow from the current $450 billion to $800 billion by 2015. At present the organized retail sector accounts for a meager 5-6% of the overall Indian retail market compared to 85% in US, 80% in France and 66% in Japan. However, organized retail is expected to grow at the rate of 30% in the years to come, presenting a massive opportunity for the investors.

However, foreign investors may not find it easy to break into the complex India retail market due to factors such as under-developed supply chain, price competition, low margins, cultural and regional disparity in consumer preferences, etc. A careful analysis of the challenges for foreign retailers highlights the importance of experienced overseas Indians who are, due to their cultural background, said to be better placed to make sense of the Indian retail market. Sound knowledge of the Indian market as well as organized retail practices will contribute to the success of overseas Indian investors. In any case, the overseas Indians associated with organized retail sector abroad are likely to play a crucial role in the success of foreign retailers in India.

Civil Aviation:

The revised foreign direct investment (FDI) policy allows foreign airlines to contribute up to 49% in the domestic airlines through the government approval route with certain other conditions. It is interesting to note that the NRIs can invest up to 100% in the domestic airlines through automatic route i.e. without any prior approval of GOI.

Currently, the ninth largest, India is expected to be amongst the top five aviation markets in the world by the year 2020 as the annual passenger traffic growth continues to average around 17–18 percent. The revised FDI policy is likely to attract strategic investment from foreign airlines looking to expand into emerging markets. As the growth potential in the developed markets continues to be slim, the window of opportunity in the Indian skies appears to be attractive. It would be interesting to see how overseas Indians make use of this extended opportunity. The revised FDI policy means the NRIs also have the option of partnering with foreign airlines to start/extend their operations in India.

Similarly, the FDI reforms in power exchanges and broadcasting sectors present attractive investment opportunities for overseas Indian investors. The GOI has made their investment friendly intentions clear to the global community with the big bang reforms. To summarize, the above-mentioned policy initiatives will go a long way to revive the investment environment and investor sentiments. Indian economy was in desperate need of some bold steps to get back to the path of strong fiscal growth. The otherwise strong fundamentals of the Indian economy and the revised FDI policy reforms will help the country to reclaim its title of most attractive destination for investment even at the time when global outlook stays grim. Weak Rupee, market size, higher returns, and stable economic growth make it an ideal time for investing in India.

Originally published in http://www.oifc.in/INVESTING-IN-INDIA/INVESTMENT-INFO/INSIGHT/OIFC-REFORMING-INDIA-S-RETAIL-AND-AVIATION-SECTORS-AND-THE-OPPORTUNITIES-FOR-OVERSEAS-INDIANS

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