Tagged #FDI


FDI Liberalization to Boost Retail, Airlines, Banks and Property Sectors in India


The Indian Prime Minister introduced the long awaited reforms allowing foreign direct investments (FDI) in multi-branded retail and aviation sectors on Friday.

In the biggest economic policy push, more than halfway through Prime Minister Manmohan Singh’s second term, proposals to allow overseas retailers like Wal-Mart Stores Inc. and Carrefour SA to own 51% of supermarket chains, shelved last year after alliance partners threatened to revolt, have been reinforced now.

The government will also allow foreign airlines to buy stakes of up to 49% in local carriers, a much-awaited policy move that provides a potential lifeline to the country's debt-laden airlines such as Kingfisher and open fresh sources of funding for the likes of SpiceJet Ltd, Go Airlines Ltd and Jet Airways Ltd.

It’s a bold move after months of fighting high inflation, a sluggish economy and a threat of having its credit rating downgraded.,” said Bundeep Singh Rangar, Chairman of London-based IndusView. "It also put the ball back in the RBI’s court to do its part now to bolster India’s sputtering economic growth.”

"It could certainly help retail, airlines, bank and real estate industry sectors,” said Rangar. "More FDI will help big over-leveraged Indian retail companies like Pantaloon Retail and Future Group raise money and reduce debt. It will also help Indian banks, which are mostly public sector ones, with high exposures to Indian retailers, rescue their loans from turning into non-performing assets. And it will help commercial real estate prices stabilize and lift sentiment in the depressed realty markets of big Indian cities to which FDI in retail is currently restricted.”

India’s growth has been slowing and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. During April-May 2012 too, FDI in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy.

India has announced a 14% rise in the price of diesel, the first increase in more than one year, in an attempt to cut the country's budget deficit.

"The RBI has been reluctant to ease rates without the government doing its part to fix its budget deficit,” said Rangar. "The diesel rate hike was the minimum needed to get the RBI to act.”

On Monday, the Reserve Bank of India’s review of its monetary policy will be keenly watched for any changes to its key lending rates.

Together with this increase in diesel prices, the decisions announced by Commerce Minister Sharma in New Delhi mark a sustained effort to ease criticism of Singh’s administration. The government has been assailed by two years of corruption allegations, while its agenda has been criticized by opposition parties and coalition allies alike.

Late last year, the cabinet had also allowed 51% Foreign Direct Investment or FDI in multi-brand retail, but suspended its plans after Ms Banerjee, whose Trinamool Congress is second largest constituent in the ruling United Progressive Alliance (UPA) and opposed to FDI, threatened to leave Singh’s Congress-led UPA.

The move had been strongly opposed by tens of thousands of small businesses and corner-shops, which fear they will be put out of business. But this latest move has already been welcomed by economists and industry, who say it will transform the way Indians shop and boost the country's flagging economy.

Prime Minister Manmohan Singh is the only Prime Minister since India’s founding Prime Minister Jawahar Lal Nehru to return to power after a full five-year term in office. Singh’s liberal economic policies have rolled back much of Nehru’s socialist economic construct that saw dismal growth rates for nearly five decades of post-independent India.


FDI in India


Foreign Direct Investment (FDI) is a major source of investment for a developing country like India where it expects investments from multinational companies to improve countries’ growth rate, create jobs, to share their expertise, and research and development in the host country.

India, the world's second-fastest-expanding major economy, has opened many sectors for foreign investments since 1991 but still strictly regulates investment in some sectors such as retail, defense, health and education.

Opening up these sectors to foreign investment will help provide local companies much-needed capital in the wake of a slowing economy following sustained monetary tightening by the central bank to control inflation.

Recently this year the government has moved a step closer to allow FDI in multi brand retailing in India after the Committee of Secretaries gave its nod to permit 51% of FDI in the sector. The recommendation will now head to the cabinet committee on economic affairs, which will take a final decision on rules to be imposed and the level of FDI to be allowed.

The government is likely to raise the limit of foreign direct investment in single-brand retail trading to 74% from 51% at present, even as it has plans to raise the limit to 100% in a phased manner.

Also,government recommendations include making it mandatory for entities with FDI should source at least 30% of their requirements from the micro small and medium enterprises (MSME) sector. The Indian government is considering the minimum investment to be $100 million.

At present, India allows 51% FDI in single-brand retail and 100% in cash and carry format of the business. It is considering allowing 100% foreign investment in single-brand retail and opening up the multi-brand retail sector as well.

While most foreign retailers may not jump in immediately after the liberalization of the FDI in multi-brand retails, the main players are definitely considering entry in India, two India-based industry bankers said. According to an inter-ministerial report, foreign retailers such as Wal-Mart (US), Metro (Germany), Tesco (UK), and Carrefour (France) favor unhindered entry into multi-brand retail.

Once the legislation is passed, major Japanese players in the convenience store segment such as Seven & I Holdings, Lawson and FamilyMart will also make a move to expand into India, a Tokyo-based banker said.

The Indian retail industry is the 5th largest in the world. The size of the retail industry in India is around $590 billion as reported by Indian Council for Research on International Economic Relations (ICRIER). It is projected to grow at a pace of 20-30% annually and, is expected to grow to about $900 billion by 2014, according to the global consultancy and research firm PricewaterhouseCoopers.

Currently more than 80% of the retail industry is concentrated in large metros. The unorganized/self-employed retail constitutes around 96% of the market. The unorganized retailers are spread across the country and are numbered at around 10 million. The share of organized retail in India is just over 4% as compared to 66% in Japan, 55% in Malaysia, 30% in Indonesia, and 20% in China.

The introduction of FDI in multi-brand retail will lead to increased demand, which in turn will catalyse more investment opportunities in organised retail.

India may by this year-end decide on allowing FDI investment in multi-brand retail, according to Commerce Secretary Rahul Khullar.