Walmart – the US$ 500 billion retail giant has acquired 77% stake in Flipkart – the leading Indian brand in e-commerce segment – with an investment of US$ 16 billion. The balance 23% will be with minority investors including Alphabet [a subsidiary of global internet giant Google] which will invest US$ 1.5 billion.
Walmart is not new to the Indian market. It came to India initially in 2007 in the ‘wholesale cash and carry’ business viz. sale to wholesalers and other bulk buyers [including institutional agencies] under a joint venture [JV] arrangement with Bharti Retail. This was under the then FDI [foreign direct investment] policy which allowed foreign investor 51% stake in this business.
In 2012, the then government under UPA-II liberalized the policy to allow 100% FDI in the wholesale cash and carry business. It also permitted 51% FDI in multi-brand retail [MBR] or the so called brick-and-mortar. But, this was subject to several restrictions such as minimum investment of US$ 100 million [50% of this should be in building back-end infrastructure], investor sourcing 30% of the requirements locally from small and medium enterprises [SMEs] and prior approval of the concerned state government.
In the run up to discussion on the policy for FDI in retail and in the hope that a conducive policy would be put in place, Walmart was seriously contemplating entry into MBR in a JV with Bharti Retail Limited [BRL]. But, that was not to be. The 2012 policy announcement permitting 51% FDI in MBR came with a plethora of riders [see above] which tantamount to micro-managing the initial investment and subsequent operations. That acted as a spoiler.
As a consequence, the retail giant abandoned the idea of taking a plunge into MBR and instead decided to focus wholly on cash and carry wherein the government had cleared the way for 100% FDI. For the same reason, it decided to part ways with BRL even while putting the other plan on hold. This happened in 2013.
Since then, there has not been much change in the policy for FDI in MBR except that in the budget for 2016-17, the finance minister announced 100% FDI in food retail – both offline and online. However, such investment was subject to retailer selling only the food procured from farmers in India and processed locally and undertaking investment in back-end infrastructure.
As a follow-up, even as the government approved entry of Amazon.in in food last year, the riders continue to haunt foreign investors. The requirement to sell ‘locally’ produced food forecloses import option. A further condition that foreign retailer cannot sell any item other than food takes away the flexibility to improve margin which in food business per se are limited. The obligation to invest in back-end infrastructure in agriculture makes matters worse. What then has resurrected Walmart’s interest in India?
This has a lot to do with the guidelines notified in 2016-17 to allow 100% FDI in so called ‘market-place’ model – defined as an IT platform where sellers and buyers conduct transactions. The permission is subject to conditions viz. not more than 25% sale by a single vendor, no advertisements or discounts etc. However, in ‘inventory’ based model of e-commerce [where the company also owns the inventory of goods and services], FDI is prohibited.
Why should 100% FDI in ‘market-place’ model evince so much of interest? This is not the same thing as direct selling where FDI is prohibited. But, the catch lies in the existence of a very thin line between the two models. An e-commerce company engaged in direct selling can easily camouflage its activities under the ‘market-place’ through clever documentation, for instance, by showing that it does not own the stock. The riders on entities to qualify for market place are meant to prevent misuse but those are rarely complied even as enforcement is poor.
The above arrangement is as good as permitting 100% FDI in MBR. Under it, any quantum of FDI can be brought in without any riders [there being no conditions appended to foreign investment in market place]. It is precisely this that carries enormous appeal and that is why Walmart is making full throttle entry.
This may be a win-win for both the government and the foreign investor; the former because it gets access to FDI without having to displease the domestic constituency [read: mom-and-pop or so called kirana stores] and the latter because it gets access to the vast Indian retail market which is worth US$ 500 billion and still growing at a fast pace. But, it is ‘unfair’ and lacks ‘transparency’. It allows FDI in MBR through the backdoor.
The government should clear the policy maze by doing away with all sorts of artificial distinctions in its policy on FDI. It should permit 100% FDI in multi-brand retail for all sectors [there is no logic in restricting this to food] irrespective of whether it is online or offline and without any riders. With such a uniform and non-discriminatory policy in place, several MNCs [not just Walmart or Amazon.in] will come in droves and also invest substantially in handling, storage, transportation and quality assurance – indeed all spheres of logistics – even as they see opportunities for growth.
Giving them a free hand should be seen in the larger perspective of removing the inefficiencies in existing supply and distribution chain, reducing cost and improving competitiveness of products in almost all the sectors. In food alone, it would be possible to save about Rs 100,000 crores loss annually by stemming wastage of agricultural products that currently happens due to lack of storage and transportation facilities. This in turn, will help in giving a better deal to millions of farmers and achieving the avowed goal of doubling their income
Will the new government in 2019 take a call on this?