India opened its retail, aviation, broadcasting and power sectors to foreign supermarkets on September 14, a major economic reform that has been stalled for months by political gridlock and came as part of a package of measures aimed at reviving growth.
Foreign direct investment (FDI) in India's largely unorganised retail sector will help curb inflationary pressure by easing supply side constraints and revive economic growth, analysts said.
However, some experts have the opinion that it could hamper firms hoping to set up shop in the world's second-most populous country.
key aspects of the policy:
States to decide on implementation
Individual state governments will decide whether to allow foreign supermarket chains to enter. The Congress party-led government hopes this will take the sting out of opposition from regional parties who say the policy will destroy jobs.
Opponents of the reform include Mamata Banerjee, the chief minister of West Bengal and the most powerful ally in Prime Minister Manmohan Singh's government.
FOR: Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Jammu & Kashmir, Manipur, Daman & Diu and Dadra and Nagar Haveli are in support of the UPA government’s move.
AGAINST: Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have formally stated their opposition.
Sourcing from small companies
Foreign retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than USD 1 million. Supermarket chains will certify compliance with this themselves.
The government will reserve the first right to procure food produce from farmers before companies do, in order to provide stocks for its food subsidy schemes for poor households.
Minimum investments
Foreign retailers will have to invest a minimum of USD 100 million, and put at least half of their total investment into so-called 'back-end' infrastructure, such as warehousing and cold storage facilities.
This requirement has to be met within three years of a retailer setting up shop.
The aim is to meet one of the key justifications for opening the supermarket sector to foreign players -- revamping the country's crumbling infrastructure and unclogging bottlenecks.
The bottlenecks fan inflation, which has proved a major headache for the government and the Reserve Bank of India.
Policymakers argue opening the sector will help ease prices for a country where hundreds of millions live in dire poverty.
Big cities
Foreign retailers will only be allowed to set up shop in cities with a population of more than 1 million. In states where there are no cities with such a big population, individual state governments can choose where to allow foreign chains to open.
Critics of the new retail policy, including from opposition parties and domestic traders, say opening the doors to the likes of Wal-Mart will wipe out the country's small, family-run neighbourhood stores and trigger mass unemployment.
By restricting foreign firms to cities, the government hopes the supermarkets will become accessible to the country's swelling middle class, while protecting the livelihoods of shopkeepers in smaller towns and rural areas.
Indian Economy: FACTBOX
According to the latest Central Statistical Organisation (CSO) data, the Indian economy grew at a sluggish 5.5 percent in the April-June 2012 period as compared to 8 percent in the corresponding quarter of the previous year.
The GDP growth had slumped to a nine-year low of 5.3 percent in the quarter ended March.
The decision to push forward the reform process has come at a time when business sentiments have taken a beating, GDP growth is near decade low, inflation remained stubbornly high and the government was criticised for "policy paralysis".
India an ideal FDI destination
A recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010–2012. India has seen an eightfold increase in its FDI in March 2012.
As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware.
Mauritius, Singapore, US and UK were among the leading sources of FDI for India.
According to Ernst and Young, foreign direct investment in India in 2010 was USD 44.8 billion, and in 2011 experienced an increase of 13 percent to USD 50.8 billion.
FOREIGN DIRECT INVESTMENT IN INDIA
- 51 percent FDI in multi-brand retail
- FDI cap in broadcasting raised from 49 percent to 74 percent
- Sale of equities in four PSUs including Hindustan Copper Ltd (9.59 percent), Nalco (12.15 percent), Oil India Ltd (10 percent) and MMTC (9 percent)
- Foreign investment in power exchanges
- Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Jammu & Kashmir, Manipur, Daman & Diu and Dadra and Nagar Haveli are in support of the UPA government’s move
- Bihar, Karnataka, Kerala, Madhya Pradesh, Tripura and Odisha have formally stated their opposition
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