Reduce Restrictions on Foreign Investment in India’s Multi-Brand Retail

By Aman Thakker —

Source: Paulancheta’s flickr photostream, used under a creative commons license.

Status: Not StartedIndia only allows 51 percent foreign direct investment (FDI) in multi-brand retail. Further, tough investment regulations targeting foreign investors in this sector have hampered foreign investments.

High Difficulty: Legislation, Light OppositionReforms to remove restrictions on FDI in retail will be politically challenging due to opposition from trade unions, state governments, and political parties that promote a “swadeshi” economic worldview.

This is the eighth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.

India’s retail sector accounts for over 10 percent of India’s gross domestic product  and eight percent of total employment. Despite India being a premier retail FDI destination among emerging markets, attracting US$ 1.66 billion between April 2000–March 2019, the government has pursued a policy of “reform through fracture” in this sector, as my colleague Richard Rossow notes. Such a policy has led firms such as Carrefour and Walmart to seek clarity before investing more heavily in India in brick and mortar retail outlets. The Indian retail sector has tremendous potential for growth with a projected  growth rate of  12-14 percent to become a $1.2 trillion industry by 2021, as retail investments doubled in 2018. The retail industry’s ability to absorb and create employment depends heavily on sectoral liberalization with the current net employment growth outlook at a meager 2 percent.

Besides sectoral growth and expansion, the government should relax restrictions on foreign investment in the multi-brand retail sector to boost farmer incomes, lower consumer prices, enhance food safety and storage, and further integrate India into the global supply chain.

Increase in Farmer Incomes

Leaders of several farmer associations such as the Consortium of Indian Farmers Associations (CIFA)Bharat Krishak Samaj, and the National Horticulture Board, have expressed their support for further liberalization of FDI in retail as it would improve the livelihoods of their members. P. Chengal Reddy, former Secretary-General at the CIFA, has argued that presently the current system, where farmers must work with middlemen, “does not favor farmers because they lose five percent of the value in transportation, ten percent in broker commission and ten percent in quality parameters,” and that, “direct purchase by large retailers will solve this problem.” By promoting “farm-to-fork” models in India, Reddy believes that greater FDI can increase farmer incomes by 40 to 50 percent.

Lower Prices for Consumers

The Associated Chambers of Commerce and Industry of India (ASSOCHAM) conducted a survey of over 2,000 Indians across 10 major cities in 2011, which found that 90 percent of consumers believed removing restrictions on foreign investments, “will bring down prices and offer a wider choice of goods.” The survey went on to note that, “with increased competition, stores will offer heavy discounts to increase their sales, according to 85 percent of consumers. When a large number of micro, small, and medium enterprises move to the organized sector, quality standards will improve and lead to good shopping experience.” Foreign investment in retail can, therefore, lower prices for consumers.

Food Safety and Storage

According to a 2015 study undertaken by the Central Institute of Post-Harvest Engineering & Technology in Ludhiana, farmers in India faced a post-harvest loss of nearly $12.5 billion (Rs. 92,651 crore) due to spoilage of stored harvest as a result of poor storage and warehousing facilities. Capital-heavy retailers can become crucial partners to farmers to avoid high losses, contracting and co-investing in infrastructure. A study by ASSOCHAM found that, in the state of Uttar Pradesh, investment in the cold storage sector could see a 10-fold growth over the next five years with foreign capital, creating modern storage infrastructure in the state. Liberalizing FDI in retail will, therefore, promote investments in better storage facilities for India, preventing wastage and boosting sales for farmers.

Global Supply Chain Integration

By easing restrictions on foreign investments in the Indian retail sector, the government can also ensure that Indian goods are part of the global supply chain. Raghunath Patil, the president of a farmer’s union called the Maharashtra Rajya Shetkari Sangathana, argues that,“FDI in retail will open up the international market for Indian farmers. We are happy that we are getting opportunity to come out of a pond and become part of a larger stream.”

India’s retail market is expected to grow at 12 percent per year until 2020, when the size of the market will equal $1.1 trillion. Foreign investment in the multi-brand retail sector, however, continues to be limited due to government restrictions on minimum investment size, sourcing rules and location limitations. The government should remove such restrictions, and simplify the FDI regime, as it will improve incomes for farmers, lower prices for consumers, and boost employment for unskilled workers.

Mr. Aman Y. Thakker is an Adjunct Fellow (Non-resident) with the Wadhwani Chair in U.S.-India Policy Studies at CSIS and the J.B. and Maurice C. Shapiro Scholar at St. Antony’s College at the University of Oxford. Follow him on twitter @AmanThakker.

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