Reports are trickling out of India its government could look to push through long-awaited legislation to open its US$450bn retail sector to multi-brand foreign direct investment (FDI).
Many in the fresh produce sector hope allowing FDI in multi-brand retail will bring about much needed investment in the country’s cold chain infrastructure and increase direct sourcing of produce.
While a move to introduce FDI was shelved in December of last year following widespread social and political opposition, Reuters has reported double-digit food inflation, souring investor sentiment, and intensifying political pressure are creating a climate favourable to retail reform.
A finance ministry official told the news source changes allowing foreign companies ownership of up to 51 per cent of supermarkets could improve business sentiment, increase foreign investment capital and help strengthen the plunging rupee. Indian newspaper the Business Standard reported that FDI capital declined by 41 per cent in April of this year. Meanwhile, economic growth in the first three months of this year slipped to 5.3 per cent compared to 9.2 per cent over the same period in 2011, according to Reuters.
Indian Prime Minister Manmohan Singh reportedly told delegates at the recent G20 summit in Los Cabos his government was committed to reviving investor sentiment. While he did not outline what steps might be taken to court foreign investment the announcement coincided with leaks to Indian newspapers the government would look to push through its plan to allow FDI in multi-brand retail.
There is still speculation as to when the government might make its push, although it is unlikely to happen before the 19 July presidential election and possibly not until after the monsoon session of parliament concludes in late August.
In an earlier move to appease foreign investors and help pave the way for FDI in multi-brand retail the Indian government passed legislation in January allowing 100 per cent FDI in single-brand retail. Previous regulations capped foreign ownership at 51 per cent.
Swedish home furnishings giant Ikea has since approached the Indian government with a proposal to establish 25 stores in the country at a cost of US$1.9bn – the largest single investment in the sector to date. In an application to the government Ikea stated the first stage of development would involve investing US$758m to open 10 stores. The second stage would involve investing US$900m in opening 15 additional stores.
According to a report by the Business Standard, however, the home furnishing giant has requested policy changes the government may find difficult to accept.
The problem relates to a stipulation that retailers source 30 per cent of their stock from local producers, which Ikea said would not be possible from day one or “any time soon thereafter”.
It will be difficult for the government to overhaul its policy to appease the likes of Ikea as FDI in retail is already deeply unpopular in the country where independent stores account for around 95 per cent of all retail.
