FDI in Multi-Brand Retail:Boon or Bane?
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India is a retailer’s dream due to its large upwardly mobile population and impressive growth rate. With the domestic retail sector projected to grow exponentially in the coming years, India has consistently been rated as one of the most desirable destinations for global retailers across an array of surveys and market reports.
While the country’s foreign direct investment (FDI) regime has witnessed progressive liberalization over the past decade, entry into the highly coveted multi-brand retail segment - which encompasses departmental stores that aim to provide consumers with all their myriad shopping needs under one roof - continues to remain barred. However, global retail giants like Walmart, Carrefour, Metro AG and Harrods may believe they have good reason to cheer with the recent decision of the Union Cabinet to permit FDI upto 51% in this hitherto prohibited sector.
A reading of the fine print accompanying the proposal that has been greenlighted by the Union Cabinet is quite revealing. For starters, FDI in multibrand retail comes under the approval route, which means that the investment requires clearance of the Foreign Investment Promotion Board (FIPB). While at first sight this may not appear encouraging, foreign investors must take note that India has traditionally preferred to tread cautiously with respect to reforms in sensitive sectors, with restrictions generally being eased gradually over time.
Parallels can be drawn with the ‘cash and carry wholesale trade’ segment, which was allowed by the Indian government upto 100% under the approval route in 1997. In 2006, such investment was brought under the automatic route, which meant that prior approval of the government would not be required, thereby giving it a tremendous fillip. Similarly, while investment upto 51% in the single brand retail segment under the approval route was permitted in 2006, today it is at the cusp of being...