Removing Restrictions on Foreign Investment in India’s Retail Sector

By Aman Y. Thakker —

Globus retail store in a Kolkata mall in West Bengal, India. Source: Paulancheta’s flickr photostream, used under a creative commons license.

  • Status: In Progress – While the government has allowed 100 percent FDI in single-brand retail, it mandates that foreign firms source 30 percent of what they sell from local manufacturers. On multi-brand retail, government restrictions on investment size, sourcing rules, and location of investments have hampered foreign investments.
  • Difficulty: Medium – Reforms 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 sixth installment in a series of articles on the Modi Reforms Scorecard by the staff and experts at the Wadhwani Chair in U.S.-India Policy. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and what impact such reforms could have on specific sectors or the economy at large.

India’s retail sector accounts for over 10 percent of India’s gross domestic product (GDP) and 8 percent of total employment. Although retail in India has attracted $1.14 billion in foreign direct investment (FDI) since 2000, the government has pursued a policy of “reform through fracture” in this sector, as my colleague Rick Rossow has noted. Such a policy has led firms such as Ikea, Carrefour, and Walmart to seek clarity before investing more heavily in India. The government should relax restrictions on foreign investment in the retail sector, thereby boosting incomes and employment, lowering prices, enhancing food safety and storage, and further integrating 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 for FDI in retail as it would improve the livelihoods of their members. P. Chengal Reddy, former Secretary-General at the CIFA, has argued that, currently the current system, where farmers must work with middlemen “does not favor farmers because they lose 5 percent of the value in transportation, 10 percent in broker commission and 10 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.

Boost in Employment Opportunities 

A survey conducted by the Confederation of Indian Industry that concluded in January 2012 found that 48 percent of leaders at small and medium companies believed greater foreign investment would have a positive impact on employment in their sector. Indeed, a report by the Indian Staffing Federation found that foreign investments in the retail sector could “create 4 million direct jobs and almost 6 million indirect jobs including contractual employment within a span of 10 years.” Foreign investment, can, therefore boost employment in sales, store operations, merchandising, customer service, supply chain, and logistics, offering opportunities in non-high-skilled sectors to India’s unemployed youth.

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. Foreign investment, however, can prevent such losses. A study by ASSOCHAM found, in the state of Uttar Pradesh, that FDI in the cold storage sector could see a ten-fold growth over the next five years with foreign investments, 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 India’s 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, has argued 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 this sector, however, continues to be limited due to government restrictions and the establishment of different FDI regimes for different types of retail. The government should remove such restrictions, and simplify the FDI regimes, as it would improve incomes for farmers, boost employment for unskilled workers, and lower prices for consumers.

Mr. Aman Thakker is a Research Associate with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow him on twitter @AmanThakker.

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