Easing of retail FDI norms may not have immediate impact

The relaxation of foreign direct investment (FDI) norms in retail (announced on Thursday) certainly augurs well for the growth of the $500 billion organised Indian retail industry. But industry observers don't expect foreign retailers to come and set up shop right away.

"The relaxation in the FDI norms may create greater interest among foreign investors, but I am doubtful if it will lead to a surge in international investments," says Bijou Kurien, President and Chief Executive (Lifestyle), Reliance Retail.

Earlier pre-conditions required foreign retailers to source 30 per cent of their products locally from the time they began operations in India. The new rules allow the figure of 30 per cent local sourcing to be reached over a period of five years. This had become a sore point for foreign retailers .

Also, foreign retailers were earlier required to put half their total investment in back-end infrastructure like warehouses, cold storage chains etc. The new rules says that they would need to invest 50 per cent of only their initial investment on back-end infrastructure, not subsequent investments.

However, foreign retailers still have a number of concerns.

The most important one is the issue of brownfield and greenfield investments. The current rules do not allow a foreign investor to take over an existing retail business (brownfield investment).

"A lot of foreign investors such as Walmart already have huge investments in India and those will get wasted," points out Kurien.

Also only 11 of the 28 states in India are ready to allow foreign investment in FDI. The remaining states, ruled by political parties opposed to FDI in retail, will not even allow a franchisee presence for foreign investors, which again is a huge issue.

Moreover, with general elections round the corner, most big companies would like to wait to gauge what the attitude of the new government formed after the polls will be towards FDI in retail.

Will it reverse the policy? After all, it was the union government's indecisiveness, plus the opposition of various political parties to FDI in retail that adversely impacted the retail growth story.

"While the big boys will start re-thinking their India strategy, they will want to wait for the elections to get over," says Pinaki Ranjan Mishra, Partner and Head of Retail Practice, Ernst & Young.

"The foreign players will not invest immediately, but those who are waiting to come in, will certainly start planning," says Kishore Biyani, CEO, Future Group, who believes that the recent wave of relaxations will definitely step up investments.

Unfriendly policies are not the only deterrent, says Harminder Sahni, CEO of retail consultancy, Wazir & Co. The current market conditions with spending plunging and rupee depreciating, do not make India such a great place to invest in.

"The foreign brands pay duties of up to 30 per cent and with the rupee depreciating they have to raise prices," he says.

The ball now is in the court of the global retailers, remarks Mohit Khattar, CEO, Godrej Natures Basket, with the government having made some efforts to spur investment.

But it needs to be seen if these relaxations are attractive enough to woo foreign retailers.