FDI In Retail And Infrastructure Investment

The decision to allow 'Foreign Direct Investment' (FDI) in retail was ratified in Parliament recently. With this, the rather unusual and extra hype given by media, to an ordinary economic policy decision by the Government of India, has played itself out. Or so we believe, as a major political party has threatened to annul this policy if they are elected to govern. With what confidence will foreign companies make investments in this sector is another good guess.  Be that as it may, the true economic effects of this policy for the people of India will be known only after several years of implementation.

The salient features of the policy are:

(a) minimum investment will be USD 100 million (b) retail stores can be set up in cities with a population of more than 1 million as per Census 2011 (c) in States that have endorsed the Centre's decision to allow 100% FDI in retail (d) at least 50% of the FDI shall be invested in back end infrastructure like facilities for processing, manufacturing, distribution, design, improvement, quality control, packaging, logistics, storage, warehouse, agricultural market produce infrastructure, etc. Investment in land and rentals will not be counted under this limit (e) at least 30% of the value of procurement of manufactured and processed goods needs to be mandatorily sourced from "small industries".

The market size of Indian retail is currently around USD 500 billion, and is expected to grow to USD 1.3 trillion by 2020. The share of organised retail in India is very low at 5.5%, as compared to 85% in USA and 66% in Japan. Even other emerging economies like Brazil with 36% and Russia with 33% have a large organised retail sector. This makes India an attractive market for organised retail, though it can be argued that the performance of Indian organised retail till now has not been very encouraging. An estimate of the size of the organised retail market in India is placed at USD 84 billion by 2016, which is a growth of 26% compounded annually. This is a huge business opportunity. Retail is a large sector, providing services to practically every household in the country, and employment and livelihood to several hundreds of thousands of people. Despite historic examples, there is considerable uncertainty regarding the effects and consequences of FDI in retail, and this has also contributed to the emotions in the debate.

It is expected that FDI inflows will be USD 2.5 - 3 billion in the next 3/5 years, with food and grocery items accounting for the highest share. This is not a small amount, and this capital inflow will add to our forex reserves as well as have multiplier effects, through its spending, on the domestic economy.  Expenditure on real estate like land for warehousing, and rentals for stores and support facilities will form a significant part of the total investment, and to the extent there are several formats of retail stores that will come into India, there will be demand for different real estate infrastructure.

It is likely that land developers and construction companies will have good business prospects, to meet the emerging demand from foreign retail companies, and there will also be flow of new technology to meet the specifications of the foreign retail companies. Considering the size of the Indian market and the expected growth rate, large foreign retail companies will be investing on a substantial scale in this basic infrastructure.  Apart from the investment in front end stores; there will be even larger investment in back end facilities.

(a) Handling, processing, packaging and quality control facilities in the warehouse, prior to shipment to individual stores;

(b) Large retail players will be importing several products for sale in India. This involves investment to be made for handling such goods at the port; and also for transportation from port to individual warehouses and stores all across the country.

(c) Modern and efficient facilities for storage and transportation of perishable and non- perishable products;

(d) Logistics and cold chain facilities need to be augmented in a big way to meet the huge requirement that will emerge;

While these facilities are present in our country, they are in small pockets and not on a scale that is needed for our size and distances. Consequently there is huge wastage in handling, storage and transportation, particularly in the case of perishable products. Inability to transport goods in a proper way from the production centre to the consuming centre is a big challenge in a large country like India, and lack of proper infrastructure leads to price distortions and wastages, and we cannot afford either. Investments have not flowed into this area because of low returns, caused by the presence of many unorganized players who resist change. FDI in retail should correct this deficiency, and we can expect far less wastage of what we grow and cultivate, so that both producer and consumer are benefited.

Environment, conservation of energy, and control on discharge and treatment of effluents are very critical issues today for sustainable and healthy growth of the planet. Any investments made today must address these factors. It is expected that current technologies and practices used in these areas in developed countries will be brought to India in a big way through FDI. For example, temperature and humidification control and monitoring in a huge warehouse,  transportation by road, packaging and handling of 'soft' products, are areas where even if we have the know-how, investments were not made as the return on investment ( ROI) to the private investor was not attractive. With FDI, the ROI factor will be addressed, and the technology and capital required to make these investments will also be easily available. 

Foreign investment in retail sector will be looking to the infrastructure and allied sectors in India to provide the services and support required by them to establish and operate their businesses efficiently. 

Category distribution of retail sector in India