The Union government has allowed 100 per cent foreign direct investment (FDI) in single-brand retail through the automatic route. Local sourcing norms too have been relaxed. Big brands from the West are now set to set shop in India. Subir Ghosh writes

It had been coming for a while. And when the Union government announced that India would now be open to 100 per cent foreign direct investment (FDI) in single-brand retail through the automatic route from the forthcoming fiscal year 2018-19, it was a prelude to the Prime Minister's interactions with chief executives of top multinational companies at the World Economic Forum (WEF) meeting in Davos, Switzerland. Among other things, Narendra Modi was expressly there to woo investors.

Initially, the announcement of January 10, 2018 was to have actually been made during the Budget presentation next month. But since the Prime Minister was already set for Davos, the grand declaration was advanced. This enabled Modi to invite investments into the country through his address to global chief executives at the summit citing this major "retail reform."

Sure, a major move it certainly has been-one that is expected to transform not only the retail landscape, but have an indirect bearing on domestic manufacturing to a considerable extent as well. The decision has been met with mixed reactions-industry is happy; traders are not. Advocates are happy; critics are not. What one gets to read and hear in the frenetic discussions that have been set abuzz is an inconsistent mix as well-one of facts and speculation. There is fact, and there is imagination.

Facts are writ in stone. One such detail is that an existing clause that was purportedly hindering FDI inflows has been done away with-foreign retailers can now delay having to meet the 30 per cent local sourcing norm by five years. Moreover, single-brand retailers can set off "incremental sourcing of goods from India for global operations during [the] initial five years, beginning April 1 of the year of the opening of first store against the mandatory sourcing requirement of 30 per cent of purchases from India." After five years, a company will have to meet the sourcing criterion every year. Although 100 per cent FDI was already permitted in single-brand retail, only up to 49 per cent was allowed through the automatic route, and investment above that needed official sanction.

In short, the entry of big brands has been made easy. Yet, contrary to what many have been saying, this is not an opening of the floodgates. That would happen if and only when similar barriers are lifted for multi-brand retail. But no one as of now is guessing when that might happen, if at all. At this moment, all eyes are trained on brands like Hennes & Mauritz AB, the Swedish multinational clothing-retail company known for its fast-fashion clothing for men, women, teenagers and children, and Ikea, the Swedish-founded Dutch-based multinational group that designs and sells ready-to-assemble furniture, kitchen appliances and home accessories. H&M started operations in India in 2015, and Ikea has been reported to be planning a 2018 launch. Both had been reported to be lobbying for such a relaxation.

H&M, of course, is only the first among the branded lot, particularly because of its top-of-the-memory recall value. If industry buzz is anything to go by, over 200 fashion and apparel brands are already lined up to enter India. These include labels like Avva, Colin's, Damat, Tudba Deri and Dufy. Japanese clothing and accessory retailer Uniqlo, which had applied for a single-brand retail venture in India, too may now soon make an appearance under the automatic route.


New games, new rules, new outcomes

Speculation has been rife in industry since the announcement over what will happen over the next few years. Whatever does, will happen in a particular socio-economic context: personal disposable incomes have been on a constant rise, and the fascination for high-quality branded products-be it electronics or apparel-is reflected in the proliferation of foreign brands in the country.

Most of the action will start on two fronts. First, Indian companies that sell in the premium range will have bigger and tougher competition at hand, given that most foreign brands may be positioned in the higher price point bracket. Second, to start with, the tussle will remain confined to the metros and the tier-I cities. For this to spill over into the tier-II and III towns will certainly take a while. Very broadly, three scenarios are likely to emerge, and three eventualities are likely to transpire.

As if one needs to say this: the first eventuality will be the survival of the fittest. The retail market has always been the most cut-throat and sees the most aggressive of strategies. Competition, possibly from the word go, will be unyielding. The battlelines will at first blush get drawn along domestic vs foreign, but gradually be fought at two levels: between the big Indian and foreign brands, and the smaller ones at the lower level. Every brand will have to live up to the promise it holds, and judicious and shrewd use of both technology and deep pockets will count more than ever before. Advertising budgets will expand, and retail margins will be on the lower side.

Second, unorganised retail which still constitutes almost four-fifth of the Indian retail market is going to take a hit, and that is not a matter of uninformed speculation. Even though the action is not likely to trickle out into the tier-II and III towns at the onset itself, Indian brands will need to expand their own footprints in the metros and other big cities. When that happens, the unorganised sector in these urban territories will feel the squeeze. In the bargain, many will go the organised way, and others simply disappear. The introduction of the goods and services tax (GST) in July 2017 had paved the way for the unorganised sector to become organised. Now, that process will accelerate.

Third, the Indian government will have to go with the flow. As far as official speak is concerned, this move-as was evident from the Prime Minister's meeting with officials of top companies in Davos-is an extension of the government's strategy in liberalising FDI policies and facilitating the ease of doing business. The last FDI frontier that remains to be breached, certainly from the government's point of view, is that of opening up multi-brand retail. That could well be an eventuality, but whether that happens will depend much on what impact the January decision has on domestic manufacturing. New brands and new companies would mean new jobs, but most of those would technically be in the services sector. The relaxation of the 30 per cent clause on domestic sourcing, however, is likely to be perceived as a blow to the Make in India initiative. Unless retail is driven so much by consumption that the domestic market itself booms, and indirectly boosts manufacturing.

However, not everything has been laid out clearly. For instance, the government is yet to define the "state-of-the-art" and "cutting-edge technology" required earlier of high-tech companies to open single-brand stores. The government had rejected Apple Inc's application to open stores in India holding that its technology was not "cutting-edge." In August last, the government set up a committee under the department of industrial policy and promotion (DIPP) secretary Ramesh Abhishek to define the two terms. Though the recommendations of the panel have not been made public, those definitions are not germane to the textiles/apparel/fashion/retail industry.

Coincidentally, the government's announcement came a day after Edelweiss Securities released a report saying that the organised retail sector in India as a whole was poised for exponential growth. According to Edelweiss, the sector was set to grow in the region of 13 per cent compound annual growth rate (CAGR) to become a $166 billion industry in FY 2025 from $55 billion in FY2016. Favourable macros such as improving consumer sentiments, rising disposable incomes, urbanisation and lower penetration of organised retail were the reasons for this boom.

Big fish, small fish

By and large, industry has welcomed the announcement, and this was reflected in the retail stocks that rallied by as much as six per cent on January 10 itself. Shares of Indian Terrain Fashions went up 6.66 per cent, Future Enterprises climbed 5.11 per cent, Provogue (India) rose 4.93 per cent, Monte Carlo Fashions gained 3.99 per cent and V-Mart Retail increased by 3.68 per cent on the BSE.

Predictions are being made, and numbers cited. Analytics company CRISIL is expecting the market share of organised retail to rise to around 10 per cent by fiscal 2020 compared to 7 per cent last fiscal. The firm said in a statement shortly after the announcement: "Better operating environment for single-brand retail would also mean the pace of store additions by organised retailers will be faster than the annual 10-12 per cent CRISIL had presaged earlier. The impact of relaxation in rules would be more pronounced in the apparel, luxury goods, home decor, footwear, and electronics segments, which ratchet up ~45 per cent of India's organised retail revenues."

Amit Bhave, director at CRISIL Ratings, remarked, "All this will mean increase in competition for domestic organised B&M (brick and mortar) retailers. However, more foreign retailers vending their ware would also lead to sharper focus on, and improvements in, supply chain efficiencies which will benefit the sector over the medium term."

Professional services firm JLL India too was buoyant. Its managing director for retail, Pankaj Renjhen, believed that the timing of this announcement was significant since the retail sector is poised to receive significant real estate supply in the near future. "After a prolonged slowdown in the retail sector over the last few years, we saw a strong comeback with developers and investors betting high on the sector. Retail saw a significant increase in PE (private equity) investments in 2016-17 indicating a significant growth in retail real estate in the coming years. The announcement of 100 per cent FDI through direct route will open up India as a global retail market."


Speaking to Business Standard newspaper, Rajesh Jain, managing director and chief executive of Lacoste India, put it straight: "Normally, most brands prefer having a local partner because they know the nuances on the ground. Some brands such as H&M and Decathlon came on their own. Now they do not have to apply to the government and wait for approval, because even if it is a formality, it still took a lot of time for them to get the final nod. That timeline will go away; so many brands might want to enter India. Not that it will give a major push, but it would be incremental."

A BMI Research report, issued just days after the announcement, said the FDI norms relaxation for single-brand retail in the country would be a boost for fast fashion majors aiming to expand their consumer base. Moreover, a large young adult consumer base, rising disposable incomes and growth in the middle-income segment make India a "favourable market" for fashion retailers, it said. "We believe that recent changes to this policy will bode particularly well for fast fashion majors looking to expand in India," the report said. "Young adults are the core target group for fast fashion majors on the back of their strong interest in fashionable yet affordable apparel," it added. With rising disposable income, Indian consumers will be able to spend a greater share of their incomes on non-essential goods and services, the report noted.

Most of the sentiments seen or heard in the media have been about big investments and how the decision on single-brand retail is going to change the landscape, that too from big players. But in India, there also exist many others who are not big brands. Small-time traders are upset. The Confederation of All India Traders (CAIT) says the decision would lead to an easy entry for multinational companies and harm domestic trade. "It's a serious matter for small businesses. It is a pity that instead of formulating policies for the welfare, upgradation and modernisation of existing retail trade, the government is more interested in paving way for the MNCs to control and dominate the retail trade of India," the national secretary-general of CAIT, Praveen Khandelwal, said.

Talking about investments

There are two angles from which to look at the subject: that of transforming the retail landscape itself, and that of using retail to attract foreign investment into the country. FDI is considered crucial for India, which needs around $1 trillion for overhauling its infrastructure sector such as ports, airports and highways to boost growth. Foreign investments will help improve the country's balance of payments situation and strengthen the rupee value against the US dollar.

Prior to the 1990s, the retail industry had been highly fragmented and utterly unorganised. Familyowned small stores, popularly known as mom-and-pop stores, were the major players. It was only in the post-1991 era that custom duties started to be reduced and there was a shift from the quota to a tariff based system. India became a member of the World Trade Organization (WTO) in 1995, and wholesale trade, franchising and commission services were liberalised. The first changes in the retail sector came in 1997 (long after the process of liberalisation had been set off in 1991), when FDI up to 100 per cent was allowed under the government route in cash-and-carry (wholesale) trade. The impact of the change turned out to be positive, leading to a series of changes over the years.


In February 2006, the earlier Manmohan Singh government allowed 51 per cent FDI in retail. Between 2006-07 and 2014-15, the sector attracted $135 million of FDI. The FDI changes of January 2012 in single brand and multi-brand carried out by the government had been at that time described as "major." India then approved reforms for single-brand stores with 100 per cent ownership with the caveat that the retailer should source 30 per cent of its goods from India.

The present government has been working towards attracting foreign investments since it took over in May 2014. In November 2015, the present government eased FDI norms across 15 sectors. It eased several conditions for single brand retail and e-commerce. In 2016, it tweaked the mandatory local sourcing norm by exempting foreign firms coming in with state-of-the-art technology from the mandatory local sourcing norms for up to three years. In June 2017, the Foreign Investment Promotion Bureau (FIPB) was abolished and the Foreign Investment Facilitation Portal put in place.

Henceforth, the DIPP will process applications under the automatic route in cases where the investment is from a "country of concern." Security clearance for such FDI proposals was earlier dealt with by the ministry of home affairs (MHA). For all proposals under the approval route requiring security clearance, the administrative ministry concerned will process the application.

The January announcement included an emphatic assertion by the government which insisted that its efforts were paying off and that the numbers vindicated the moves that it had been making, "Measures undertaken by the government have resulted in increased FDI inflows in to the country. During the year 2014-15, total FDI inflows received were $45.15 billion as against $36.05 billion in 2013-14. During 2015-16, country received total FDI of $55.46 billion. In the financial year 2016-17, total FDI of $ 60.08 billion has been received, which is an all-time high."

There is, however, more than what meets the eye. In June 2017, two economists sifted through the numbers and remarked, "Data reveals FDI inflows are growing because foreign investors are claiming more and more stakes in the Indian start-ups and brownfield ventures. Unlike in the case of a greenfield investment, where the parent company constructs new production facilities and builds distribution hubs, in brownfield investment the foreign company or government entity purchases or leases existing production facilities to launch new production activity in the host country."

Their findings, published on the Wire portal, pointed out, "While the government is trying to attract more and more FDI, which is an admirable goal, the nature and distribution of FDI inflows across sectors need a close look. As it stands, a liberal FDI regime through the automatic route may fail to achieve the larger socioeconomic objectives of job creation and may, in fact, hasten spatial income inequality. The conditions attached with FDI therefore need to be tailor-made with an aim of creating jobs, and possibly a strong domestic sourcing requirement clause."


Moreover, considerable amounts of FDI have gone into buying of stressed corporate assets, and that too at a time when the global FDI flow has been slowing down. According to the February 2018 issue of the Global Investments Trends Monitor of UNCTAD, "Global flows of foreign direct investment (FDI) fell 16 per cent in 2017 to an estimated $1.52 trillion from a revised $1.81 trillion." Equity investments at the global level fell by almost 40 per cent mainly due to a 23 per cent decrease in the value of cross-border M&As (mergers and acquisitions), the report observed. India stood 10th among the top host economies for FDI inflow in 2017 with $45 billion, way behind China which had $144 billion. The US remained at the top with $311 billion. The other indicator is the foreign exchange reserves that India has in hand: only $419 billion compared to China's $3.325 trillion. FDI as a percentage of the gross domestic product (GDP) too has fallen, according to the World Bank database-from 3.657 per cent in 2008 to 1.964 per cent in 2016.

Source in India

Irrespective of what happens in terms of winners and losers in the grand retail battle, the subject of local sourcing will remain in the limelight and can possibly become more contentious as days go by. Even as early as in 2012, the Financial Times had reported that Ikea was holding back plans to enter India, citing the local-sourcing clause as an obstacle. "We need to see what (the restrictions) will mean for us. We are patient because the conditions need to be right. In this sector, when everything seems to be okay, then we will be in," chief executive Mikael Ohlsson was quoted as saying.

Some others adopted a different approach. A handful of single-brand foreign retailers gained access to the Indian market through licensing agreements/joint ventures (JVs)/partnerships. For instance, Zara and Marks & Spencer entered into JVs with Trent and Reliance Retail respectively. But the number of such brands remained on the lower side, and pressure kept mounting on the government to relax the sourcing clause. Luxury fashion manufacturers like LVMH and Gucci kept describing it as a stumbling block while contending that it would be difficult to source high-end goods locally.

In the summer of 2014, shortly after the present dispensation came to power, the government was said to be mulling over diluting the sourcing norms. "How can luxury brands source 30 per cent from India? It is simply not possible. Single-brand retail policy needs to be eased to allow foreign brands to invest in the country. We are working on that right now," a DIPP official told a daily.

If big brands are wary about local sourcing, they do have a genuine concern: brand content dilution would not be acceptable to any of them. Yet, this contention would not make much sense to those who maintain that India itself is one of the many apparel sourcing hubs for Western brands. Cost might be a factor when it comes to choosing between an Indian supplier and, say, a Bangladeshi or Vietnamese one; but quality? Not many would buy that argument, certainly for non-luxury fashion.

Nevertheless, herein also lies that proverbial opportunity-for those apparel producers who are not in that big existing league of supplying to Western brands. They can upgrade, innovate, render themselves more efficient, and join the brandwagon. All that might need some governmental intervention, though. Second, such measures would take time to crystallise.

That's when the new FDI norms can dovetail with Make in India.