The Government is soon expected to come out with a concept paper on the retail sector that would particularly look at relaxing FDI norms in this sector. There are still doubts on whether this is a move to relax FDI norms or just another forum to reiterate what has been repeatedly said, 'no further liberalisation in retail'.
India's FDI regime in the retail sector is constantly under the review of the Government. It has maintained a restrictive stance in the retail policy despite the popular belief among policy makers that single-brand retail is doing well in India. Foreign investments in this sector have been increasing consistently and have been less susceptible to external shocks. However, will the popular belief be put on paper this time?
FDI on the growth pathIn 2006, the Government for the first time eased retail policy in the country by allowing up to 51 per cent FDI through the single-brand retail route. Since then, there has been a steady increase in FDI in the retail sector; the sector's share in total FDI flows into India have increased from zero to 0.2 per cent in a two-year period. The cumulative FDI in single-brand retail stood at $190 million in February 2010.
FDI data since 2007 demonstrates a steadily rising trend in the single-brand retail sector. Besides, there has been less volatility in FDI flows even during periods of world-wide recession. The retail policy relaxation was followed by a series of doubts about the sustainability of FDI in the retail sector. Moreover, the global slowdown that adversely affected demand in most economies raised concerns regarding the flight of capital from the Indian retail sector.
Contrary to the belief, foreign investment in the single-brand retail sector in India has been resilient to external shock. Given its large population and rapidly expanding middle-class, there is growing demand and a market for almost everything in the country. As a result, when most countries were facing a demand crunch, foreign brands rushed in to invest in the Indian market, illustrated by a clear peak in FDI during mid-2008, in the accompanying figure.
From 2006 to March 2010, around 94 foreign players applied to invest through the single-brand route, of which 57 entities got approval. The percentage increase in FDI flows in the retail sector over the last two years has been higher than that in sectors such as the services sector, trading and telecommunications, which have a much higher share in the country's overall FDI.
Moreover, direct investment, which is the key source of foreign capital in the retail sector, is less volatile than equity or institutional investment. As a result, there is a lower risk of the market being affected by the adverse effects of stock market changes and consumer confidence. According to a 2010 A.T. Kearney report, India ranks third after China and the US on the FDI Confidence Index while it is the top location for non-financial investment. The study found that if the Indian retail sector becomes more open in future, it could become a vital, high potential market like China.
Foreign investors in China are lured by the increased domestic demand and high potential for retailers, contributing to overall growth in China. In addition to this, foreign retailers in China have increased their sourcing from Chinese SMEs, which now have a 70 per cent share in exports. Over the past few years, the retail sector in India has been successful in attracting and retaining foreign investment. The Indian market is emerging as an attractive destination for foreign investors interested in investing in the retail sector. In such a scenario, given the forthcoming opportunities, policy restrictions would not be the best way to protect traditional retailers.
The Government should, in turn, impose regulations such as sourcing requirements, zoning regulations and back-end investment requirements to protect traditional retailers. This could, in fact, help in SME sourcing from India, as in the case of China. In countries such as China, the retail sector has been a major propellant of growth and with a more liberal FDI policy, the story can be repeated in India.