FDI in Retail - A Consultative process at last

I'm really happy to mention here that the Government is finally taking some concrete steps to solve the FDI in Retail imbroglio. On realizing that despite several clarification notes released by the Department of Industrial Policy and Promotion, the list of doubts and clarifications sought by the retailers grew ever longer and precious little in terms of investment came into the country on this platform.

Now, with a view to fully understanding the concerns of the industry, the Government has decided to have an interactive session with the head Honchos of the Retail Industry on the 27th of this month, and hopefully, this consultative process will result in some of the bottlenecks being eased. I hope we will see some investment finally coming in after this meeting.

In the background of the above meeting, I have written to the Secretary DIPP, giving a couple of suggestions on how one can approach retail policy in India, from the perspective of a Retailer. I do hope Mr. Chandra will read my mail and it will help in putting some of the aspects in perspective.

http://m.business-standard.com/wapnew/storypage1.php?id=5&autono=113062400091

From: "Hemanth Sharma" <sharma.hemanth@gmail.com>
Date: 19 June 2013 7:51:30 IST
To: <chandras@nic.in>
Subject: FDI policy for Retail

To,

Mr. Saurabh Chandra,

Secretary

Department of Industrial Policy and Promotion,

Government of India.

Dear Mr. Chandra,

I write this mail in the background of the article in the Economic Times, stating that the “Government may further simplify FDI norms in multi-brand retail” (please see link), and several other recent press reports and comments that discuss the policy and the poor response received to the policy from the Retail industry.

http://articles.economictimes.indiatimes.com/2013-06-17/news/40027734_1_investment-guidelines-dipp-clarifications

Permit me to introduce myself. I currently work with a very large Indian retailer as a General Manager (however, I write this mail solely in my personal capacity), and have been in organized retail in India and abroad since its infancy in 1996. I have been a keen student of retail, its market dynamics and policy for many years, and hence I have acquired a certain level of expertise in this industry and I would like to offer a couple of suggestions. May I also add that just before moving back to India, I was working with a Far East Asian Retailer, who was very keen on entering India through the FDI route, and I was privy to several discussions that took place in this connection, and hence I possess a certain level of familiarity with the concerns that my then employer (and no doubt many others like him) have with our FDI policy.

A senior official of my far East employer had mentioned that they are able to carry out their retail business in some 20 countries from the very liberal, to highly controlled economies of Eastern Europe, but none were as attractive or as challenging to enter in as India. He also made a remark that they would be happy to even work with just 26% FDI, but would require the rules governing the same to be highly relevant to retail, and be simple, transparent and permit them to make a reasonable return on investment in return for the job creation, infusion of Foreign Exchange, generation of Tax revenues and the general positive rub-off that retail can bring to the economy. In this scenario, our current policy unfortunately does not lend itself to a conducive investment climate, particularly with all political opposition that retail faces in India. I would like to make a couple of suggestions for your consideration.

While retail essentially means buy-store-move-sell when viewed for a very broad perspective, this paradigm has to be constantly modified depending on the type of products, method of acquisition, shelf life, market cycle, pricing, buying pattern and other dynamics. Thus, the need for investments in the chain, or determining the quantum of investment required for the front end and the back end, and other such decisions are based on the products sold and not whether they are of a single brand or of multiple brands. For instance, a multi-brand electronics superstore will require virtually no back end investment, while a single brand gourmet food chain will require huge investments in the back end. Thus, if one is to align the policy to the way retail works, the current classification of Single Brand Retail and Multi Brand Retail needs to be replaced with “Non-Food Retail” and “Food Retail” classifications.

Non Food Retail should be made as free and uncontrolled as possible, as this type of retail is not expected to have any impact on the Kirana stores, it should also be permitted to be propagated as freely as possible. Such a move will improve the investment climate for retail in India virtually immediately, and open up the country for a vast number of brands. However, I do agree that as India needs to protect the millions of Kirana stores selling food and FMCG, we can make the policy for Food Retail as strict as the politics of the issue demands. Food retailing will also need large investments in the back end in the form of infrastructure that the country does not possess (Harvest collection points, Grain Elevators, Cold Storages etc.), and insisting that 50% of the FDI goes towards the creation of the same is totally justified. I’m sure you will agree that this is not the case in Non-Food Retail.

One other rule that most international retailers have difficulty in conforming to, is the rule mandating local SME sourcing to the extent of 30% by value of goods sold. – One would like to submit that it is not feasible for some retailers to achieve this, for instance technology retailers (Laptops, Cameras Televisions etc.) to source any of their products locally as their product line follows global sourcing, where the best factories provide world class quality products, or even retailers who sell products that are GI marked (Swiss Cheese, Belgian Chocolate, Italian sauce etc). Thus, this rule has become a stumbling block to investment. If it is possible, the following easing of the norms for this rule could be considered:

·         Make compliance voluntary, but incentivize its acceptance by introducing ‘bragging rights’ like “Products Sourced from India” stamp.

·         Another incentive could be to offer some temporary tax sops to retailers who meet the 30% sourcing by value norm.

·         The rule should also permit sourcing from any Indian manufactured source and not restricted to SME’s. My former employer who wanted to get manufactured, his Private Label Skin Care, Hair Care and Cosmetics products, will not be able to work with anyone less competent than an ITC, Godrej or similar. Going to an SME would risk liability particularly when the heath of the customer is in question, and no retailer will be willing to do that.

·         Those who choose to go to a capable SME should be encouraged. However, an SME who grows to become a large scale industry on the strength of his supplies to a retail chain should not be dis-incentivized for his success.

·         Lastly, the sourcing rule of achieving 30% from day one is a very major challenge, as any retail chain will need to have some critical mass in terms of establishing themselves as a high-recall brand as well as in achieving a number of stores before being in a position to absorb such quantities of merchandise procured locally. Please consider introducing a window period of 5 years from launch, before which this norm of selling 30% of the merchandise sourced from India, needs to be conformed to.

In addition to the above two suggestions, any other easing of the rules will surely go a long way in bringing the much needed investment into the Country. I also understand that you are planning to meet industry representatives on the 27^th of June to seek their inputs. I congratulate you for adopting this consultative process and for your promise of hand-holding the investors during the startup phase. My best wishes are with you in this regard.

Thanks & Regards,

Hemanth Sharma