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CONCEPT PAPER ON FDI IN RETAIL TRADE INTRODUCTION Retail trade is a state subject and States have their own

regulations. As such, there is no national level framework for its development and regulation. At the central level, only the flow of Foreign Direct Investment (FDI) into the sector is regulated. Till recently, FDI in single brand was permitted to the extent of 51%, and FDI in cash and carry wholesale trading permitted to the extent of 100%. 2. In order to enable the Government to take an appropriate policy

decision regarding FDI in multi brand retail trade (MBRT), Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry released a discussion paper in July 2010 to elicit views and suggestions on the subject. analysed An InterMinisterial Committee under the Chairmanship of responses received. This was also followed by Senior Economic Adviser, Department of Consumer Affairs examined and the recommendations on the subject by an Inter-Ministerial Group chaired by Chief Economic Adviser in the Department of Economic Affairs, Ministry of Finance. 3. Based on the above findings and suggestions, a decision was taken

to permit FDI in MBRT to the extent of 51% and FDI in Single brand retail to the extent of 100%. However, the decision in respect of both multi and single brand retail had some conditions attached to protect the interests of agriculture, food processing, electronics, textiles and SME sectors in a manner consistent with international conditions, as spelt out in subsequent paragraphs. PROPOSAL AS FINALISED BY GOVERNMENT 4. A decision has been taken by the Government to permit FDI in MBRT

in all products, in a calibrated manner, subject to the following conditions:

(i) (ii)

FDI in Multi Brand Retail Trade (MBRT) may be permitted up to 51%, with Government approval; Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded.

(iii) (iv)

Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million. At least 50% of total FDI brought in shall be invested in 'backend infrastructure', where back-end infrastructure will include capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure will include investment made towards house, processing, agriculture manufacturing, market produce distribution, infrastructure design etc. improvement, quality control, packaging, logistics, storage, wareExpenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure.

(v)

At least 30% of the procurement of manufactured/ processed products shall be sourced from Indian 'small industries' which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose.

(vi)

Self-certification by the company, to ensure compliance of the condition at serial nos. (iii), (iv) and (v) above, which could be cross-checked as and when required. Accordingly, the investors to maintain accounts, duly certified by statutory auditors.

(vii)

Retail sales locations may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Master/Zonal Plans of

the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking; (viii) Government will have the first right to procurement of agricultural products 5. Alongside a decision was also taken to permit 100% FDI in single

brand retail trading, subject to the following conditions: (i) (ii) (iii) FDI in single brand retail trading may be permitted up to 100% with Government approval; Products to be sold should be of a Single Brand only. Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India. (iv) (v) (vi) Single Brand product-retailing would cover only products which are branded during manufacturing. The foreign investor should be the owner of the brand. In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from Indian SMEs/ village and cottage industries artisans and craftsmen. 'Small industries' would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. The compliance of this condition will be ensured through self-certification by the company, which could be subsequently checked, by statutory auditors, from the duly certified accounts, which the investors will be required to maintain. BENEFITS TO STAKEHOLDERS 6. The policy will have the following benefits: Farmers stand to benefit from the significant reduction in postharvest losses expected to result from the strengthening of the 3

backend infrastructure; and direct purchases by the retailers, thereby obtaining remunerative prices for their produce. Needless to say, that Government has limited capacity to make the massive capital investments required in backend infrastructure and the supply chain, which is expected to be supplemented, to some extent, by private sector investments, through this policy measure. Small manufacturers will benefit from the conditionality requiring at least 30% procurement from Indian small industries. This would provide the necessary scales for these entities to expand their capacities, thereby creating more employment; generating higher incomes and strengthening the manufacturing base of the country. The sourcing condition will also enable the small enterprises to get integrated with global retail chains. This, in turn, will enhance their capacity to export products from India. As far as small retailers are concerned, a major apprehension expressed is that they will be eliminated. In this context, you would be aware that organized retail already co-exists with small traders and the unorganized retail sector. It has been found that there was a strong competitive response from the traditional retailers to these organized retailers, through improved business practices and technological upgradation. Global experience also indicates that The entry of organized and unorganized retail co-exist and grow.

FDI into the sector will incentivize them to upgrade and become more efficient, thereby resulting in better services to consumers, as also better remuneration to the producers from whom they source their products. Small retailers will continue to be able to source high quality produce at significantly lower prices from wholesale cash and carry points. The young people joining the workforce will benefit from the creation of employment opportunities, in the entire range of activities from the backend to the frontend retail business, as also from the skills imparted to them by the prospective investors.

Consumers stand to gain the most, firstly, from the lowering of prices that would result from supply chain efficiencies and secondly, through improvement in product quality, which would come about as a combined result of technological upgradation; efficient grading, sorting and packaging; testing and quality control and product standardization. exports. All these factors would together result in better quality produce, not only for domestic consumers, but also for While consumers, cutting across all income levels, will benefit from the efficiencies in supply chain management this policy measure is likely to benefit the poorer sections the most. Lowering of prices will arrest the erosion of real incomes and the existing incomes of the economically disadvantaged sections will be able to buy more than before. income levels will also rise. CONCERNS EXPRESSED IN REGARD TO SAFEGUARDS MADE BY GOVERNMENT 7. THE POLICY AND On the other hand, as supply-chain efficiencies are built up and producers get remunerative prices, their

The following concerns were expressed in regard to the policy and One concern expressed is that this policy would result in flooding of the market by cheap, imported products. The safeguard pertaining to a minimum of 50% investment being made in back-end infrastructure is an in-built incentive for investors to use the investments so made in the backend infrastructure to produce/source products locally rather than import from outside which would necessarily carry the additional costs of tariffs, insurance and freight. Given this situation, it would make very little economic sense for these retailers to go in for large scale imports. Hence, local sourcing would spur substantial economic activity and income generation. As for the concern that foreign retailers will resort to predatory pricing, it is important to note that a strong legal framework, in the form of the competition commission, which covers all sectors, is 5

safeguards made by the Government:

available to deal with any anti-competitive practices, including predatory pricing. The calibrated approach provided in this policy will ensure limited presence of such entities which would make it difficult for them to stifle competition. An important issue that has been raised is that this policy should not be imposed on States that do not wish to allow foreign investors to set up retail outlets within their jurisdiction. The Government of India has, through this policy decision, only provided an enabling policy framework. It remains the prerogative of the respective State The Governments to adopt it or not. FDI policy does not override the extant laws governing trade and commerce in the country. State Government laws and regulations in this regard would apply as much to the foreign players, as to the establishment of any domestic businesses in the retail sector. 8. Therefore, the policy will have an overall beneficial effect on producers, notably, the farmers; small industries and other manufacturing enterprises; the consumers; as well as existing retailers. As stated above, the impact will be more pronounced for the low income sections of society. Hence, the policy decision on FDI in retail is aimed primarily at providing relief to the vast majority of the people in the country who are presently unable to get remunerative prices for their products on the one hand and are forced to pay exorbitantly for the same due to market inefficiencies. At the same time, it has to be seen in the context of providing an enabling policy framework, which is one among the many constituent components of the existing laws that govern trade and commerce in the country. PRESENT STATUS 9. The decision has been suspended in order to evolve a broader

consensus among various stakeholders.