Draft Report of the High Level Group on Services Sector

7.2 Issues in Retailing

7.2.1 Foreign Direct Investment

After the introduction of economic reforms in 1991-92 foreign direct investment was gradually liberalized in both manufacturing and services sectors, starting with permission given on a case-by-case basis. At that time one or two foreign companies were given permission to do retail business in the country. However, the position changed in 1997, and contrary to the general direction of reform FDI in retail was prohibited on fears that entry of foreign retail companies would have an unfavourable impact on the unorganized sector and would lead to the outflow of foreign exchange. Since then the policy has been relaxed partially and in 2006 foreign companies were allowed to invest up to 51% equity in single-brand retail joint ventures.
FDI in multi-brand retailing is still prohibited. However, the point is made that FDI has made inroads into retailing through several routes. 100 % equity is allowed for cash-and carry wholesale trading but there is no dividing line between this activity and retail trading. There is nothing to prevent the end-use consumers to make wholesale purchases meant for their own consumption. Inroads into activity in the domestic economy have also been made by foreign enterprises through franchising, which is permitted. Further the following types of trading, which is permitted partake of the nature of retail activity:

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  Trading of hi-tech items requiring specialized after-sale service
  
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  Trading of items for social sector
  
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  Trading of high-tech medical and diagnostic items
  
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  Test marketing for a period of two years for items for which a company has approval for manufacturing
  

Even so retailing is the only large service sector, which has not been formally opened to FDI in a big way. Since some policy makers want to maintain the momentum of liberalization many of them feel that there should be some more movement toward liberalization. Among the gains that they visualize are the technology and know how coming into the country with the large retail chains. The backward linkages developed by the large retailing organizations are likely to help in the scientific development of farming. The case is cited of Macdonald’s, which has invested in setting up of supply chains and transferred state-of-the-art food processing technology. Macdonald and its suppliers also worked closely with farmers in some locations in the country to cultivate high quality lettuce (Arpita Mukherjee and Nitisha Patel, FDI in Retail Sector, India, ICRIER, 2005). The most significant point that is made is that once the foreign retail chains develop local supplies up to their standard for the local operations, they can also source the same products for the operations in home country as well as in third countries. The activities of the large retail organizations can thus become a big avenue for increasing exports from the country. However, these arguments have not been enough to convince the opponents of FDI in retail and there is lack of consensus on the issue in the ruling coalition.