Inter-Ministerial Group Discusses Opening Up FDI in Multi-Brand Retail

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Jun. 10 – An inter-ministerial group (IMG) on inflation has suggested permitting foreign direct investment in multi-brand retail as one of two steps to reduce rising prices and cut down the margin between farms and retail prices.

It was the first formal proposal by a government panel to permit FDI in the closely policed and sensitive retail segment.

It is the proper time to allow FDI in retail in India as reform in this sector can be an effective inflation busting measure. The proposal will be discussed by the government and then sent to the cabinet for sanction.

The government currently permits 51 percent FDI in single brand retail and 100 percent FDI in the wholesale cash-and carry sector, but has been reluctant to open up the multi-brand section to overseas contribution fearing opposition from small shop owners and political parties. But high inflation has compelled the government to focus on restoring the supply chain – predominantly the distribution of food grains, fruits and vegetables.

The IMG is concerned that access of FDI in the country’s retail sector should be appropriately synchronized and steps should be taken to prevent these new corporations from becoming monopolistic and charging high prices.

The government has taken various steps to ease the pain of high food prices while the Reserve Bank of India (RBI) has lifted interest rates nine times since March 2010 to pacify inflation, which at present stands at 8.66 percent, much above expectations.

Several overseas retail companies such as Wal-Mart and Carrefour are already present in the wholesale trading segment and other top retailers have been gazing entry into India’s multi-brand retail sector for the past several years. According to the estimation, the country’s retail sector could be worth nearly US$260 billion by 2020.

The IMG also suggested refurbishing the Agricultural Produce Marketing Committee (APMC) Act to facilitate farmers to bring their products to retail outlets and also permit retailers to directly procure from the farmers without facing obstruction by traders. It said the APMC system has assisted monopolistic behavior and reduced the choices available to small farmers.

High prices of food have compelled the government to set up the IMG in early February and the group has been handed the job of recommending policies to check food inflation and demand management. In India, the percentage of organized retail in the total retail trade is just over 4 percent compared with 66 percent in Japan, 20 percent in China and 55 percent in Malaysia.

The IMG says China has permitted FDI in multi-brand retail since 2004 and the benefits have been clear. According to the IMG, one way of playing an enabling role is to allow FDI in multi-brand retail. This is a way to get new technology to come into the country and expand organized retail. While this policy alone may not achieve all the results, it can be an important step in serving the interests of both consumers and farmers in the long run.

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