Allowing foreign firms free play in India’s retail sector has always been a political hot potato. The Government has therefore been opening up this sector to foreign players in baby steps. The latest was allowing 100 per cent Foreign Direct Investment (FDI) in single-brand retail trading through the automatic route last week. But not everyone’s cheering.
What is it?
Earlier, foreign players could own up to 49 per cent in a local single-brand retail chain but had to approach the department of industrial policy and promotion (DIPP) for a go-ahead to acquire the remaining 51 per cent. Now they can fully own their Indian operations without applying for permission.
But the new concessions apply only to single-brand retail chains. FDI in multi-brand retail trading in India is still capped at 51 per cent. What’s a single-brand retail chain? It is expected to sell all its products under only one label across its stores. Think Levi’s, Starbucks or Ikea. A multi-brand retail store is like your typical Big Bazaar which sweeps many brands under one roof.
There are a few strings attached, though. If an MNC operates a single-brand retail chain, the product must also be sold under the same brand name globally. The MNC must also source 30 per cent of its purchases for the business from India. This rule was slightly relaxed last week to allow an MNC to set off any local sourcing for its global business, against this 30 per cent quota.
Why is it important?
While foreign investors may salivate at the thought of selling to a 1.3 billion population, retail trade in India is dominated by mom-and-pop outlets. Those opposed to FDI worry that opening the door to 800-pound gorillas will draw away consumers from these tiny outlets to giant departmental stores, and squeeze their suppliers too.
The new proposal is a compromise solution which tries to protect such outlets while earning the Government brownie points for liberalising FDI. The policy allows the Government to test the waters on how MNC presence affects Indian retailers. And given that many of the global single-brand retailers vend only premium or luxury goods, it was also hoped that their India foray won’t impact the mom-and-pop stores much.
But there’s a bit of hair-splitting here. For one, MNCs can sell both premium and mass-market products in these single-brand stores. Two, given that all retailers essentially compete for a share of the same consumer’s wallet, spending on premium products or services can come at the cost of splurging on mass market products. One trip to Starbucks may equal your monthly bill at the Nair tea stall.
Why should I care?
If you are shopaholic with a yen for Louis Vuitton bags, Ikea furniture or Cartier watches, you may soon see more swanky stores exclusively for such brands. Single-brand retailers can offer new experiences too. Merlin Entertainments, which plans to bring Madame Tussauds to India, was one of the firms to secure the DIPP go-ahead for a single brand retail foray in October 2017. The move may also help home-grown single brand e-tailers like Urban Ladder source more foreign venture capital to bankroll their expansion. But if you feel sympathy for your neighbourhood Annachi store, you can thank your stars that 100 per cent FDI in multi-brand retail isn’t yet a reality.
The bottomline
It’s the Annachi’s customer-friendliness versus the MNCs’ glitz and glamour. May the best model win.
(The article first appeared in The Hindu BusinessLine.)