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INDIA
BUSINESS WORLD -
OCTOBER 2005
THE MONTH THAT WAS
BROAD FRAME WORK FOR RETAIL FDI
The government has
suggested a broad framework, with adequate safeguards, to
allow foreign investment in the retail sector. As per a detailed
government note foreign companies seeking to invest in India's
retail sector could face a number of restrictive clauses including
minimum capitalisation of $5 million, as and when the sensitive
segment is opened up.
According to the
note circulated among relevant Cabinet ministers, foreign
investors will initially be allowed to operate in only six
metros -- Mumbai, Delhi, Chennai, Kolkata, Hyderabad and Bangalore.
The government also proposes to restrict the number of such
outlets in these cities to 15 each.
Apart from the
capitalisation and locational restrictions, opening of the
sector to FDI would be also only for outlets with a minimum
area of 5,000 sq metre. This provision will afford some protection
for small grocers in crowded inner city areas as consolidating
5,000 square metre will be difficult there. The government
could also stipulate that at least half of this space be reserved
for food items, so that farmers can benefit by getting directly
integrated with the supply chain.
Subject to these
safeguards, the government plans to progressively allow 74%
FDI in this sector, though only 49% is proposed initially.
Further relaxation of the foreign investment limit will be
considered 4-5 years after opening up of the sector. This
would be done only after obtaining support from the Left parties.
The ministry of consumer affairs, food and public distribution,
headed by NCP strongman Sharad Pawar, has argued that FDI
in this sector should not be restricted to 49% since it may
deter major international players from investing in a big
way in India.
The commerce &
industry ministry, the Planning Commission and the finance
ministry also support FDI in retail. They feel that small
retailers of the mom & pop kind will not be hit if this
sector is opened to foreign investment -- an argument that
has been put forth by the Left and BJP. Since loss of livelihood
to small retailers has emotional appeal, the government has
now chalked out the revised safeguards. The counter argument
is that farmers, who will benefit from the move, far outnumber
local retailers.
The consumer affairs ministry is initiating discussions on
the issue at a committee of secretaries.
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