Indian retailers in a catch-22 situation on FDI in retail

Wednesday, 07 December 2011
Amid growing opposition to its decision of allowing foreign direct investment (FDI) in retail sector, the UPA government has decided to put the issue on the back burner. The much awaited approval to 51 per cent FDI in multi-brand retail was approved by the Cabinet recently. In fact industry majors like the Future Group, Bharti Retail, Spencer’s Retail and Next were jubilant since their expansion plans were to get the long-awaited foreign capital funding. But now their plans have to wait since the government has decided to put the FDI policy on hold till the political consensus on the matter reaches conclusive end. Sources say, the government is mulling reworking its policy on allowing FDI in retail, amid opposition from not just the opposition parties but also from its allies - the DMK and the Trinamool Congress.

The sudden development in the government’s plan has now put the retail majors in a fix since they had already initiated fresh talks for liaison with foreign retailers, with the hope that they would soon be able to bring the much required funds. For instance, the Future Group’s growth, which is currently at 25-30 per cent, would have increased to the growth rate to 40-50 per cent with the foreign investment. The group is reportedly in talks with multiple partners, including Carrefour.

RP-Sanjiv Goenka Group, which runs the 230-plus Spencer’s Retail stores across India, was banking upon the foreign investment too since it would have helped them in achieving the planned retail expansion. In a press conference held next day, after FDI announcement, group’s chairman Sanjiv Goenka had reiterated the same feelings. The group’s retailing business logged revenues of Rs 1,056 crore and a loss of Rs 286 crore in 2010-11. Sumantra Banerjee, president (retail) at RP-Sanjiv Goenka Group, points out FDI in retail is a must as the sector needed fresh funds. "Foreign investment in the business would have accelerated Spencer’s expansion plans." Spencer’s is banking on retail FDI to attract funds to grow and break even by attracting investment in the back-end operations.

Bharti Retail too is looking at taking their alliance with Wal-Mart to the next level by setting up multi-brand stores in India. Videocon Group, owner of Next, with more than 600 stores, is reportedly in talks with large electronic retailers, including the $50-billion consumer electronics retail giant Best Buy.

But now the question mark over implementation of the FDI policy will have to indefinitely wait for an answer. Foreign retail giants, equally keen on capturing the pie in India’s Rs 20 lakh crores retail market are keeping track of the latest developments on the matter. Industry is now expecting the government to initially open the sector to foreign investors and private equity funds, if not the retailers, till political consensus is reached. The much talked about FDI policy, which was applauded as the bold move of the Indian government to bring in reforms… is for now lying in the cold storage.