India Opens Its Doors to Foreign Retailers

The Indian retail sector, estimated at $500 billion, is expected to reach $1.3 trillion by 2020
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Posted December 10, 2012
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As of September, the government of India has relaxed its rules on foreign investment in retail to the point where an outside retail organization can own up to 51 percent of multi-brand retailing.

It’s called FDI – foreign direct investment – and multi-brand is India’s version of a department store, big box, mass merchant or anyone who sells various brands of merchandise. Other retailers that sell just, say, Levi’s denims, Nike apparel or Sony electronics fall under the category of single-brand retailing, and the new rules allow those brands to own 100 percent of their Indian ventures, outright. (Before, foreign individual brands could only own up to 51 percent of their Indian ventures and outside multi-brand retailers were prohibited.)

There are still a bunch of requirements and restrictions: The foreign investor must invest at least $100 million; at least 50 percent of the total FDI must be invested in back-end infrastructure (processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, etc.); and at least 30 percent of the procurement value of manufactured and/or processed products must be sourced from Indian small industries.

Also, retail sales outlets may be established only in Indian cities with a population of more than
1 million (as per the 2011 census) – though this is not as much of a limitation as it sounds; there are 46 Indian cities with a million people or more.

But the potential clearly outweighs the restrictions. Not only is there a sizable Indian population, but the country’s middle class – identified as individuals with a purchasing power of $30,000 a year – has grown to 300 million. The Indian retail sector, estimated at $500 billion, is expected to reach $1.3 trillion by 2020.

Whenever big retail ventures are discussed, Walmart’s name leads the list. Shortly after India’s new rules were announced, the Bentonville, Ark., behemoth said: “This policy change will allow us to connect directly with the consumer and save them money. We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation.”

As the retail community awaits Walmart’s next move, others are certainly pondering if and when to step through India’s open-door policy.