First steps towards opening up of the entire retail sector

Sanjay Sharma, March 27, 2016

With ‘Make in India’, transparency, promise of ease of doing business in the country, faster decisions and the hunger to excel, the government has given a boost to confidence amongst businesses and investors both domestically and internationally. In the Union Budget this year, the Government of India has introduced major reforms and taken commendable steps to revive economic, specifically rural growth. 

In the backdrop of the vision to double the farmer income by 2020, one of the announcements in the Food Processing Sector was 100% Foreign Direct Investment in food marketing/retailing through the Foreign Investment Promotion Board (FIPB). This basically means that foreign retailers in the food sector can set up marketing outlets in the country. This is still in its nascent stages as the policy per say and the framework for the same is still being fully crafted.

Switch to B2C

So far the 100% FDI in food processing industry was allowed through the FIPB route to manufacture and sell brands (read B2B). Now the doors are being opened to allowing FDI in food retailing and marketing (read B2C). Currently, there is 51% FDI in multi-brand retailing covering all segments, not just food. Rules allow foreign food firms to set up shop in the country to produce and market their products. However, the new proposal opens room for any global retailer to simply market/ retail products manufactured by Indian companies with the caveat that the food products on offer are manufactured in India. Allowing 100% foreign investment in the retail of domestically-processed food will give farmers greater access to the market. 

The Indian food industry is about $250 billion. The domestic consumer retail market is estimated at about Rs 12 lakh crore, of which half consists of selling food and food products. The wastage of food from the farm before it reaches the consumer is estimated to be about 15-20%, or about Rs 92,000 crore every year because of lack of storage facilities and transportation.

Better efficiency

Against this backdrop there have been many discussions and viewpoints. One is of course, better efficiency and better price for the farmers through retail giants gaining more market share. It will also benefit consumers by bringing down prices of food products as middlemen will be cut out from the equation. This is because the agriculture industry has a direct linkage with the food processing sector and the FDI inflow will help set up processing units near the farms and provide the much required infrastructure to the business. A lot has also been spoken about the cascading impact on transportation, industrial refrigeration and packaging industries as well. The other viewpoint is that the smaller food manufacturers who usually sell their products to the small retail shops will lose out if they cannot adapt to growing market competition. 

In my opinion, the smaller food manufactures will not be hit so hard and can coexist, as they operate within a separate ecosystem offering ease of convenience and comfort. Besides, Indian organised multi-brand retailers have hardly hit mom-and-pop stores’ business so far. These could be the first steps that will eventually lead to opening up the entire retail sector. With mature structures, effective management within the industry owing to the reforms, I have faith that 2016 onwards will be a year of growth and maturity for the food processing industry.

(The author is the CEO of MTR Foods)