Foreign Direct Investment (FDI) is a major source of investment for a developing country like India where it expects investments from multinational companies to improve countries’ growth rate, create jobs, to share their expertise, and research and development in the host country. India, the world’s second-fastest expanding major economy, has opened many sectors for foreign investments since 1991 but still strictly regulates investment in some sectors such as retail, defense, health and education.

Opening up these sectors to foreign  investment will help provide local companies much-needed capital in the wake of a slowing economy following sustained monetary tightening by the central bank to control inflation. Recently this year the government has moved a step closer to allow FDI in multi brand retailing in India after the Committee of Secretaries gave its nod to permit 51% of FDI in the sector. The recommendation will now head to the cabinet committee on economic affairs, which will take a final decision on rules to be imposed and the level of FDI to be allowed.

The government is likely to raise the limit of foreign direct investment in single-brand retail trading  to 74% from 51% at present, even as it has plans to raise the limit to 100% in a phased manner. Also, government recommendations include making it mandatory for entities with FDI should source at least 30% of their requirements from the micro small and medium enterprises (MSME) sector. The Indian government is considering the minimum investment to be $100 million.

At present, India allows 51% FDI in single-brand retail and 100% in cash and carry format of the business. It is considering allowing 100% foreign investment in single-brand retail and opening up the multi-brand retail sector as well.  While most foreign retailers may not jump in immediately after the liberalization of the FDI in multi-brand retails, the main players are definitely considering entry in India, two India-based industry bankers said. According to an inter-ministerial report, foreign retailers such as Wal- Mart (US), Metro (Germany), Tesco (UK), and Carrefour (France) favor unhindered entry into multi-brand retail.

Once the legislation is passed, major Japanese players in the convenience store segment such as Seven & I Holdings, Lawson and FamilyMart will also make a move to expand into India, a Tokyo-based banker said.  The Indian retail industry is the 5th largest in the world. The size of the retail industry in India is around $590 billion as reported by Indian Council for Research on  International Economic Relations (ICRIER). It is projected to grow at a pace of 20-30% annually and, is expected to grow to about $900 billion by 2014, according to the global consultancy and research firm  PricewaterhouseCoopers.

Currently more than 80% of the retail industry is concentrated in large metros. The unorganized/ self-employed retail constitutes around 96% of the market. The unorganized retailers are spread across the country and are numbered at around 10 million. The share of organized retail in India is just over 4% as compared to 66% in Japan, 55% in Malaysia, 30% in Indonesia, and 20% in China.

The introduction of FDI in multibrand retail will lead to increased demand, which in turn will catalyse more investment opportunities in organised retail. India may by this year-end decide on allowing FDI investment in multi-brand retail, according to Commerce Secretary Rahul Khullar.

A publication by IndusView Advisors Ltd.