Overriding huge opposition from allies like Mamata Banerjee and friendly parties like Mulayam Singh Yadav, the government, in a surprise move, has opened its retail sector to foreign supermarkets. This will allow global retail giants like WalMart to set up deep-discount stores in India. The decision is bound to create a much bigger political storm than what the hike in diesel prices has.
Importantly - and the government has underscored this provision - the policy allows state governments to decide whether to allow FDI in multi-brand retail or not. So, the government says, if opposition parties don't want the FDI, they can make that choice.
Multinational retailers like WalMart, Carrefour of France and Metro of Germany already have stores, but they are not allowed to sell to walk-in customers. They deal with smaller retailers, like the family-run shops in most localilities. The government had last year cleared 51 per cent FDI in multi-brand retailers for cities with populations of more than a million. But it had to rollback that decision after huge protests led by allies of the UPA government and the opposition, broke out across the country.
The decision set off fears that multinational giants will put small retailers and local shops that service households will be wiped out. Those in favour of FDI say that this unlikely since local mom-and-pop shops give personalised services like home delivery that these huge deep-discount stores won't. They also say that most of these stores, because of their size will be far fewer that local establishments.
FDI in multi-brand retail has many pre-conditions, though. The minimum FDI limit has been set at $100 million. Half of any investment has to made in infrastructure like cold-storage chains and warehouses. This is designed to help the agricultural sector and India has a severe shortage of these.
The most problematic condition, from the point of view of investors, wil be that at least 30 per cent of the good to be sold will have to sourced from local producers. Analysts say that MNCs might have a problem of quality control and supply.
FDI is single-brand retail is permitted, but that too with several conditions, including the 30 per cent local procurement. Household goods giant IKEA of Sweden wants to invest more than Rs. 10,000 crore to set up stores, but wants this rule to be relaxed. There is split within the government over this.
The government argues that FDI in multi-brand will give consumers the best deals possible on goods and also get it much-needed money.
It also says that farming sector will get a boost, since big retailers will not only source directly from them, cutting out middlemen, but also invest in cold-storages and other technology that India lacks. Those opposed to FDI in multi-brand retail say that it will be exactly the opposite: MNCs will control prices and squeeze the producers.
These MNCs are also expected to generate jobs in the areas where they set up stores as well as along the procurement chain. The government sees this as a big advantage.