India Inc is euphoric as the red carpet for Walmart, Tesco and its ilk has been formally rolled out with reports suggesting Delhi as the first city to host the global retail giants.
Riding on the retail bandwagon, the analyst community and government voices have fuelled hopes of more measures in the coming weeks like passing of key financial sector reform bills, FDI in insurance and so on.
In a September, 2012 report, Crisil estimated that allowing 51 % FDI in multi-brand retail will result in investment of $2.5 billion-$3billion in the retail sector over the next five years.
FDI in retail will also address the issue of inflation as mandatory creation of backend infrastructure may remove bottlenecks and inefficiencies in the supply chain and pave way for better farm practices and higher prices for farmers.
But getting carried away with the ‘potential’ big investments would be foolhardy as FDI in multi-brand retail is at the discretion of states. With a busy election calendar for the next one year followed by the big Lok Sabha elections, FDI in retail is unlikely to get off the ground.
After the Gujarat polls in December, there are state elections in Karnataka, Meghalaya, Nagaland and Tripura in the first half of 2013 and Madhya Pradesh, Mizoram, Delhi and Rajasthan in the second half. This means implementation of FDI in retail is at risk in the near term as the reform measure will give way to populism. With the latest Walmart controversy over lobbying claims rocking Parliament, FDI in retail has attracted severe negative publicity and is being viewed as anti-people. On current mood, even Congress-ruled states would not invite the wrath of voters and woo global retailers.
Also, riders like minimum $100 million investment, 30% sourcing from small industries, etc may act as barriers for global retailers.
However, retail stocks have been flying high in the last few months on hopes that FDI would help them forge partnerships with global retail chains and bring in funding and technology for the sector.
While FDI in retail will attract capital inflows in the long-term, it is miniscule when compared to India’s annual requirements. C Rangarajan, Prime Minister’s Economic Advisor was quoted as saying in October that India needs capital inflows of up to $ 70 billion annually for the next five years to bring its Current Account Deficit (CAD) down to 2.3% of GDP.
Apart from acting as a sentiment booster, FDI in retail is unlikely to change the fundamental equations at the ground level like elevated inflation, high fiscal and current account deficits and a weakening currency.
For the economy to decisively turnaround, structural reforms like addressing coal and power sector issues, fast-tracking investment proposals and land acquisition and green clearances are crucial.
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