Wednesday, November 30, 2011

What does 51% FDI in multi-brand retail mean?


What happened

Government has decided to allow 51% FDI in Multi-brand retails. 

What are the pre-conditions

  • Minimum investment of $100 million.
  • 50% of the investment is to be in backend infrastructure development.  
  • 30% of all raw material has be procured from small and medium industries. [Not completely sure]
  • Permission to set up malls only in cities with a minimum population of 10 lakh.
  • Government has the first right to procure material from the farmers.
  • Products should be sold under the same brand internationally.
  • Foreign investor should be the owner of the brand.
Present Condition:
  • Farmers get only 10 to 15% of the price we pay. 
  • 3-4 middlemen in between farmers and customers.
  • Huge post produce losses for farmers due to inadequate facilities.
  • A poorly managed food supply infrastructure.
Why do we need it:

  • We are the second highest producer of fruits and vegetables in the world but still we are not able to utilise is properly because of inadequate infrastructure facilities. 
  • It will reduce pre-harvest wastage/losses and thus help control food inflation. 
  • It will create 1.5 million more jobs in 5 years. Apart from the huge number of indirect employment. 
  • It will increase competition which is always beneficial for the customer.
  • It will remove the middleman from the equation. It will reduce costs which in turn will reduce prices. 
What about the problems:

There will be no problems.

We already have local players like Reliance Fresh and Big Bazaar. They have done wonderfully well. Local traders are still trading as they were. Why not allow foreign players? They will bring with them human/monetary/knowledge capital which are very important for a developing country like India. Just bringing proper storage places will go a long way in solving the wastage problem. 

China, Brazil, Argentina, Singapore, Chile, Thailand, Russia and Indonesia all allow 100% and their economies have benefited from this move. India is only allowing 51% and that too with a lot of checks. 

We don't have to worry about monopoly because the Competition Commission of India can handle all anti competitive practices including predatory pricing. 

In India, cities with population of more than 10 lakh are just 53 in number. This means that any negative impact will not have huge repercussions. Kirana store walas in majority of other cities cities will be totally unaffected. It's a small but steady step on the path of liberalization. 

It will decrease unorganized labour sector and bring them all under organised labour. This will it will be easier to enforce labour laws and also check its implementation. 

A lot of jobs will be created. Ofcourse a few will be lost as well but that number will not be very high. There will be a reorganization of the job structure rather than a reduction. 

It is true that the government can also provide all the infrastructure facilities that the companies will provide but  true governance means less government role and more freedom to the society. Why should it be a problem if companies improve infrastructure facilities in return of a gain? 

Thus we can see that the FDI rule is for the greater good of the society. Oppose it at your own risk. 


  1. Good, well laid out, exhaustive read I must say.
    I agree with whatever you have said. I am in agreement with all this and bringing FDI to India because I feel it is going to do a hell lot of good to unorganized sector. Farmers will be benefited in a way because these retailer will help them get better infrastructure to produce better quality of products and less dependence on Monsoon. Having said that, we are not in dire straits need for FDI. With better and less red-taped FII, we can still do good but I don't oppose FDI in general.

    But seeds of violence have already been sown. One FDI cash and carry store was burnt in a city. Ignorance cannot be cured. I wish what is best for India happens.

    P.S.: I think you are allowed FDI by naming your blog 2 cents and not 2 paise. Not done.

  2. Very Lucid post.
    The governmental is treading very cautiously with respect to allowing FDI in retail sector as can be seen the various checks/safeguards they have imposed. Its a good move. People need to actually take time out and go through the government proposal than just opposing for the sake of opposing.
    However I am worried whether it would be WTO compatible? specially the provision of 30% of all raw material has be procured from India's small and medium industries, if the same is nt made mandatory for local players?

  3. Abhinav: I personally think FDI is better than FII. FDI is not that easy to revoke as it takes time to stop investments and it is extremely difficult to pull back all the investments at once.

    P.S.: Two cents just sounded better. :P

    Simba: I made a small mistake. 30% was from small and medium industries but I don't think its restricted to India's small industries. I am not sure about that fact. Changes with regard to it made to the post. :)

  4. I admire your writings Apoorv. I am not addicted to internet like you nor do I knw much abt blogging but I find your blogs quite interesting. I have read only 1 or may be a few more but that was enough to make an impression on anyone. Now you have a reputation to keep. However, I think it would have been better or if I might use the word 'fair' if you could have given us the sources also on the basis of which you have analyased the said scheme. Please note that I have nothing personal against you but you have made such an impression that anuthing short of perfection is irritating me. Keep writing...its thought provoking...

  5. i dont agree with this article ....!
    obviously there are problems with this fdi as the local and mid level market or small class businesses are going to completely hit with losses and coming to big bazaars,reliance fresh they r very small enough to hit a huge line of poor and small business s were as this bill is oly for WALL MARTS ? and y do v need foreign investors if there r already reliance and future grp investing?
    because govt had cut a deal with wallmart ....

  6. we shud welcome this step of government.....
    every revolutionary concept is criticized initially.....same is the case with fdi....every one is talking about kiranawalas,owners of small buisness firms,problems they will face when this bill be passed....but what about the benefits which outnumbers the losses....better service,more employement,low level of adulteration,better returns to farmers in return of their produce....and kiranawalas have survived till now....they will survive in future also!!!!bcos there is no growth in buisness without competition....

  7. Silver: The government has cut a deal with Reliance and Future group as well. So why not WalMart? It will atleast give competition to the other two.

    Anon: I agree. Kirana walas are like cockroaches. They can survive even a nuclear war.

  8. Made out to be a smooth read.Good work!

  9. Quick question - when you say government has allowed 51% or 100% investment what does that actually mean? 51% of what?

  10. Anon: It means if Rs 100 are invested in a project, Rs 51 can come from foreign companies. The percentage is with respect to the share in the investment and/or ownership.


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