The political opposition has not completely died down, but the Government has shown its intent to push through reforms on FDI in retail. This is a strong signal that the retail industry had been waiting for and, more importantly, a positive message to domestic and international businesses.

Open doors

Fundamentally, Indian retail has a very positive outlook in the medium to long term, considering the demographics and changing consumption patterns — it will clearly outperform most other international markets, and this policy allows a foot in the door for modern retail concepts to get a share of the pie.

Retailers have welcomed the policy, but they are likely to be more measured in their actions. While opportunity stares in the face, the implementation challenges are quite stiff, as many domestic retailers have learnt in the last few years.

Single-brand retail is the immediate beneficiary — the Government has considered representations from international retailers and eased some of the clauses, such as making the 30 per cent sourcing norm from MSMEs preferable and easing the restriction on ownership of brand.

This will lead to some investment in the short to medium term, with new single-brand retailers looking to establish operations and, more importantly, existing names present in India through franchisee or joint venture partners looking to increase their stake. Some have argued that the Government has buckled under international pressure, but the changes are reasonable — else, what was the point in allowing 100 per cent FDI in single-brand?

Complexity in multi-brand

Implementation of the multi-brand policy is clearly more complex; it will require retailers to develop appropriate business models that conform to current restrictions on State permissions, but are flexible and scalable to adapt to more States that may permit the retailers in future and the risk of some States rolling back permission with a change in political leadership. A likely option is to develop separate legal entities for each State, but that would create a complex and potentially inefficient operating structure.

A significant portion of the investment is meant to develop the supply chain and intermediaries, which is the biggest inefficiency in our current retail network. Sourcing 30 per cent from MSMEs is mandatory for multi-brand and will require developing and nurturing suppliers.

In the short term, we are likely to see some developments as international players seek out appropriate partners in India, and some of the pre-announced alliances convert into real joint ventures. But it will be at least two to three years before we can have any substantial investments flowing in.

The multi-brand policy is focused on large food and grocery retailers but completely ignores non-food retailing such as pharmacy and lifestyle, consumer durables, books, departmental stores and others. Most of these categories are like single-brand retailers, where 30 per cent sourcing from MSMEs is not practical and there is no imminent threat to kirana stores. The Government could have considered a more liberal policy towards these segments and eased norms in line with single-brand.

Finally, a word about e-commerce companies — a fledgling sector that is still learning the ropes could have benefitted from the experience of international players, but they had to be precluded from the policy, given the practical limitation of implementing State permissions.

(Mohit Bahl is Partner, KPMG in India)

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