India opened its retail, aviation, broadcasting and power sectors to
foreign supermarkets on September 14, a major economic reform that has
been stalled for months by political gridlock and came as part of a
package of measures aimed at reviving growth.
Foreign direct investment (FDI) in India's largely unorganised retail
sector will help curb inflationary pressure by easing supply side
constraints and revive economic growth, analysts said.
However, some experts have the opinion that it could hamper firms
hoping to set up shop in the world's second-most populous country.
key aspects of the policy:
States to decide on implementation
Individual state governments will decide whether to allow foreign
supermarket chains to enter. The Congress party-led government hopes
this will take the sting out of opposition from regional parties who say
the policy will destroy jobs.
Opponents of the reform include Mamata Banerjee, the chief minister
of West Bengal and the most powerful ally in Prime Minister Manmohan
Singh's government.
FOR: Delhi, Assam, Maharashtra, Andhra Pradesh,
Rajasthan, Uttarakhand, Haryana, Jammu & Kashmir, Manipur, Daman
& Diu and Dadra and Nagar Haveli are in support of the UPA
government’s move.
AGAINST: Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have formally stated their opposition.
Sourcing from small companies
Foreign retailers will have to source almost a third of their
manufactured and processed goods from industries with a total plant and
machinery investment of less than USD 1 million. Supermarket chains will
certify compliance with this themselves.
The government will reserve the first right to procure food produce
from farmers before companies do, in order to provide stocks for its
food subsidy schemes for poor households.
Minimum investments
Foreign retailers will have to invest a minimum of USD 100 million,
and put at least half of their total investment into so-called
'back-end' infrastructure, such as warehousing and cold storage
facilities.
This requirement has to be met within three years of a retailer setting up shop.
The aim is to meet one of the key justifications for opening the
supermarket sector to foreign players -- revamping the country's
crumbling infrastructure and unclogging bottlenecks.
The bottlenecks fan inflation, which has proved a major headache for the government and the Reserve Bank of India.
Policymakers argue opening the sector will help ease prices for a country where hundreds of millions live in dire poverty.
Big cities
Foreign retailers will only be allowed to set up shop in cities with a
population of more than 1 million. In states where there are no cities
with such a big population, individual state governments can choose
where to allow foreign chains to open.
Critics of the new retail policy, including from opposition parties
and domestic traders, say opening the doors to the likes of Wal-Mart
will wipe out the country's small, family-run neighbourhood stores and
trigger mass unemployment.
By restricting foreign firms to cities, the government hopes the
supermarkets will become accessible to the country's swelling middle
class, while protecting the livelihoods of shopkeepers in smaller towns
and rural areas.
Indian Economy: FACTBOX
According to the latest Central Statistical Organisation (CSO) data,
the Indian economy grew at a sluggish 5.5 percent in the April-June 2012
period as compared to 8 percent in the corresponding quarter of the
previous year.
The GDP growth had slumped to a nine-year low of 5.3 percent in the quarter ended March.
The decision to push forward the reform process has come at a time
when business sentiments have taken a beating, GDP growth is near decade
low, inflation remained stubbornly high and the government was
criticised for "policy paralysis".
India an ideal FDI destination
A recent UNCTAD survey projected India as the second most important
FDI destination (after China) for transnational corporations during
2010–2012. India has seen an eightfold increase in its FDI in March
2012.
As per the data, the sectors which attracted higher inflows were
services, telecommunication, construction activities and computer
software and hardware.
Mauritius, Singapore, US and UK were among the leading sources of FDI for India.
According to Ernst and Young, foreign direct investment in India in
2010 was USD 44.8 billion, and in 2011 experienced an increase of 13
percent to USD 50.8 billion.
FOREIGN DIRECT INVESTMENT IN INDIA
- 51 percent FDI in multi-brand retail
- 49 percent FDI in civil aviation
- FDI cap in broadcasting raised from 49 percent to 74 percent
- Sale of equities in four PSUs
including Hindustan Copper Ltd (9.59 percent), Nalco (12.15 percent),
Oil India Ltd (10 percent) and MMTC (9 percent)
- Foreign investment in power exchanges
- Delhi, Assam, Maharashtra, Andhra
Pradesh, Rajasthan, Uttarakhand, Haryana, Jammu & Kashmir, Manipur,
Daman & Diu and Dadra and Nagar Haveli are in support of the UPA
government’s move
- Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have formally stated their opposition