FDI in multi-brand retail still faces hurdles in India

NEW DELHI Thu Jun 2, 2011 5:19pm IST

People shop in a store at a in Mumbai November 20, 2008. REUTERS/Punit Paranjpe/Files

People shop in a store at a in Mumbai November 20, 2008.

Credit: Reuters/Punit Paranjpe/Files

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NEW DELHI (Reuters) - India is yet to decide on allowing foreign direct investment in multi-brand retail, a senior government official said, despite a government panel's recent recommendation in favour of such a policy to help fight inflation, an indication that hurdles remain.

An inter-ministerial group (IMG) headed by Kaushik Basu, chief economic adviser in the finance ministry, last week recommended allowing foreign direct investment in multi-brand retail to tame inflation and cut farm gate and retail price differences.

His comments gave a strong signal that a decision could be made soon to open up the $450 billion retail sector to foreign investment, though it has been pending for years.

"The issue is still at discussion stage, and no Cabinet note has been prepared in this regard by the DIPP (Department of Industrial Policy and Promotion)," R.P. Singh, industry secretary told Reuters on Thursday.

Global retailers such as Wal-Mart Stores, Carrefour, Tesco and Metro AG have long sought greater access to a fast-growing but restrictive Indian retail sector that is dominated by mom and pop operators.

India currently allows 51 percent FDI in single-brand retail and 100 percent in wholesale cash-and-carry operations.

The industry department had issued a discussion paper last year asking for inter-ministerial and public comments on opening of the multi-brand retail.

The finance ministry has not yet submitted its views on the issue, while opposition parties led by the Bharatiya Janata Party are not in favour of it, citing its impact on domestic industry.

"The IMG has recommended allowing FDI in multi-brand retail with strong regulatory provisions to ensure competition and protection of the domestic industry," said Dipak Dasgupta, principal economic adviser in the ministry of finance.

The share of organised retail could go up to 12 to 20 percent of the domestic retail market once foreign investment is allowed from about 4 percent now, besides improving productivity, and its spillover impact on the domestic retail sector, he said.

FDI flows in cash and carry wholesale trading totalled $1.78 billion from April, 2000, to March, 2010.

"We expect the government would take a call on opening the sector shortly," said Dasgupta, a government adviser on prices and macro-economy.

Wal-Mart has said it is ready to open hundreds of retail outlets if rules are liberalised. It operates five wholesale outlets in India in partnership with agriculture-to-telecoms group Bharti Enterprise.

Analysts say the government may find it difficult to push controversial reform in the near future as opposition parties and the domestic players are against it, while the government is reeling under anti-corruption campaigns by civil society groups.

"BJP is strongly against allowing foreign direct investment in retail sector in any form -- 26 percent, 51 percent or 74 percent," said Yashwant Sinha, former finance minister and senior BJP leader.

"I do not subscribe to the chief economic adviser's views that opening of organised retail would lead to decline in inflation, for which distribution chains have to be fixed," said Sinha.

India's inflation, highest among the major Asian economies, eased to 8.66 percent in April, while the food inflation stood at 8.71 percent from a year ago period.

(Editing by Tony Munroe and Aradhana Aravindan)

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