India Waters Down Retail FDI Rules to Woo Reluctant Foreign Firms

India's government has announced further relaxations to foreign direct investment (FDI) rules in the retail sector with a view to attracting more investment and arresting the continued slide in the rupee.

The country opened up multi-brand retail to foreign investors last year, but no foreign supermarket chain has yet opened a store there due to strict terms and conditions in connection with the investment.

The new policies have relaxed rules governing sourcing of products, infrastructure investment and selection of cities.

Foreign players have been given five years to comply with the rule that they should source 30% of their products from small Indian firms. They would be allowed to source products from overseas initially, but would have to put 50% of their initial investment into building back-end infrastructure such as cold storage facilities within three years.

"Subsequent investment in the back-end infrastructure would be made by the retailer as needed, depending upon his business requirements," Commerce & Industry Minister Anand Sharma said.

As per the new rules, foreign retailers can also open stores in cities with a population of less than one million.

Market of One Billion People

Many foreign investors have seen India as a growth market with its population of more than one billion. The country, which is the third-largest economy in Asia, has experienced a steady rise in people's incomes and a growing middle class, enhancing the country's appeal to foreign businesses.

Despite the favourable demography, foreign players did not jump into India's retail market due to conditions set by the government. International retail giants such as Walmart, Tesco and Carrefour had demanded further easing of regulations to start operations in the country.

The Congress Party-led government has also faced stiff opposition amid growing concerns that the arrival of big firms would hurt the small retailers in the country. Critics say that big firms with their purchasing power and economies of scale could offer products at much cheaper prices than the small shops.

Market analysts are of the view that the recent relaxations would encourage foreign firms to enter India.

Sliding Rupee and Current Account Deficit

Finance Minister P Chidambaram had earlier noted that the government would liberalise its FDI policy to raise funds from foreign markets and to save the economy from a falling rupee and a huge current account deficit.

The US dollar is currently trading at 60.77 rupees, up 0.53%.

FDI inflows into India declined to $22.42bn (£14.78bn, €16.92bn) in fiscal year 2012-13 from $36.50bn in the previous year. Increased FDI is crucial for the country to finance the current account deficit.

India's current account deficit touched a record high 4.8% of gross domestic product in the financial year ended 31 March.

In addition to the changes in the retail sector, India's cabinet also approved liberalisation of FDI in petroleum, natural gas, power, stock exchanges, telecom and defence sectors.

In defence, foreign firms can hold up to 26% stake in ventures and proposals beyond the cap will be considered on a case-to-case basis. The government also gave the nod to 100% FDI in the country's cash-strapped telecomms sector, rising from the previous cap of 74%.