Liberalising FDI: What Is In For The Foreign Retailers In Food Business?

Prior to the visit of the Indian Prime Minister to the UK in November 2015, the government announced liberalisation of FDI in 15 sectors including single-brand retail and e-commerce. While there was no announcement on the much waited multi-brand retail policy, this liberalisation does offer opportunity for foreign retailers in the food and grocery segment.

Food supply chain is a key sector in which the government is looking forward to getting foreign investment. However, there is an ongoing debate on the impact of opening up the food retailing segment to foreign retailer on domestic mom-and-pop stores. The new FDI policy has tried to provide opportunities for foreign retailers to enter India through various routes, even though their most preferred route of entry -multi-brand retail continue to be only partially open.

The new FDI policy stated that a foreign manufacturer can sell its products in India through wholesale, retail or e-commerce, which is in line with the Prime Ministers "Make in India" campaign. Thus, if a company has a manufacturing unit in India it can sell its products directly to consumers online along with other routes. This will benefit companies such as Amway India, which is setting up its Rs 550 cores manufacturing facility in Madurai. The company can now directly sell its products online to consumers. Further, local manufacturing by a foreign company will enable it to circumvent the entry restrictions on imposed on FDI in retailing.

The concept of liberalising single-brand retail trading is a unique feature of the Indian retail policy, as globally, most retailers are multi-brand. For companies, such as IKEA, which are trying to enter through the single-brand retail route, there is a lot to cheer. The domestic sourcing conditions for single-brand retailers have been relaxed - retailers are not required to meet the 30 per cent sourcing condition until they open their first store. Requirement of 30 per cent doemstic sourcing has been removed for state of the art and cutting edge technology. While this will directly benefit retailers in categories such as consumer durables and electronics, its implication for food and grocery retailing is not clear. Food and grocery does involve high technology in processing and packaging some of which may not be available in India.

An important development with respect to liberalisation is that is that retailers such as Marks and Spencer's and IKEA who have opted for the single brand entry route can now enter into e-commerce. With the fast growth of online retail in India across all segments including food and grocery, the new FDI policy enables retailers like Marks and Spencer's to explore the possibilities to diversify into food retailing in India. In line with the "Make in India" campaign, the government also made provision for FDI in Indian brands subject to certain conditions. This is likely to benefit Indian brands that are facing financial shortages.

The government has also allowed a single entity to do both wholesale trading and single-brand retailing subject to the condition that FDI policy on wholesale cash and carry and single brand retail have to be compiled by both business arms separately.

Another interesting policy change is allowing 100 per cent FDI through automatic route in duty free shops in the customs bonded area. This will allow foreign retailers such as Harrods and even multi-brand retailers such as Tesco and Sainsbury to set up outlets in airports and other custom bonded areas such as special economic zones (SEZs). Thus a multi-brand foreign retailer can now have a food and grocery shop in Infosys campus in Mahindra World City SEZ in Tamil Nadu or Sricity in Andra Pradesh. SEZs like Sricity, which has attracted foreign investment in manufacturing can now get duty free shops of foreign retailers. This will help them to develop as integrated townships. This is a big reform measure for both SEZs and retail. Further, if one reads it along with the policy of allowing 100 per cent FDI in limited liability partnership (LLP) through automatic route and the liberalisation announced in construction sector, SEZs can develop as enclaves to try out liberalisation of retail. Countries such as China have first liberalised FDI in retail in its special zones and then examined the impact - when there were hardly any negative impact the policy was made applicable to the rest of the country. India seems to have followed that route.

The government has understood that retail is the most important component of the value chain and without liberalisation of retail India cannot develop as a global manufacturing hub or become a part of the global production network and value chain. The recent FDI policy is a step in the right direction, however what happens to the food and grocery segments, is a 'food for thought'.

(Tanu M Goyal also contributed to this article)