Although the policy has been there for quite sometime, I had to do my analysis before predicting any outcomes. I will focus on data points and the recent press release from the government, noting catches and feasibility of the stores across India. Background material that I have used is all linked here starting from the original policy circular, addendum press note, census data, and other references.
First off this policy is only an enabling policy and states are still free to take their own discretion. Considering the negligible amount of collaboration that had gone behind this policy formulation, other than the favored states mentioned in the policy, there will not be many other takers.
As per census 2011 data on urban population metro area, the policy allows the following 49 cities eligible
|City||Favorable State/Territory||Population (2011)|
|7||Srinagar||Jammu and Kashmir||1,192,792|
|City||Unfavorable State/Territory||Population (2011)|
Number of favorable states with more than 3 cities eligible is only 3 namely AP, Maharashtra and Rajasthan. I doubt if the likes of Wal-mart would commit investment in a state having just 1 city above the population threshold. Of course states can choose if they do not have cities more than 10 lakh and allow investments but it clearly does not favor the investor to make any returns from smaller cities.28/49 of those cities are in unfavorable states that are not supporting UPA directly and 21 are in UPA support states.
To open stores there are other considerations including land, and sourcing assuming demand exists.
Average time needed for land acquisition in Maharashtra (most favored state above) for large-scale development has been around 2 years, and that too after approvals from state. Many reasons exist including the political nature of the transactions itself, as has been seen in so many of the SEZ transactions, Singur, POSCO, etc. With the Land Acquisition Bill yet to be tabled there might be a window of opportunity as the bill renders most land acquisitions unviable. 50% of the minimum USD 100 million is to be invested in back-end development excluding land costs and rentals. That leaves a maximum of USD 50 million for land and development. My rough calculation assuming a nominal market rate of 4000 per sq ft leaves with around 600, 000 sq ft possibility. Obviously no retailer will invest in such a large format and a reasonable strategy could be to split and invest in many stores and distribution network.
Back end infrastructure norms is possibly the most useful part of the entire policy. Food loss is ranging from 25-35% in India before it can be consumed (for horticultural produce it is even higher), and don’t get me started on the amount of waste that happens as part of the government controlled distributions. Control on this and possibly selling these warehousing, transportation services to other retailers will definitely cut inflation and help the overall economy as efficiency improves.
Supply side issues coming from the sourcing norms listed in the policy are as follows 1. there may not be enough number of suppliers in favored states like Rajasthan 2. quality of produce may not be on par with retailer standards 3. amount of produce cannot meet regulatory norm of 30% from small industries. Hence transport costs will add to the retailer burden here especially when subsidies are reducing on fuels, this is not a major issue as most retailers always run large and efficient distribution and transportation network.
My feeling is, extremes of this policy being completely anti-farmer or anti-common man to being completely pro-investor or pro-consumer are both incorrect. Projections on outcomes including job creation, creating efficient back-end, and encouraging ‘small industries’ are all far-fetched considering favorability for investor in only few pockets. Enabling conditions for quality investments (even for domestic institutions) in retail is still a long way to go including cost of land, capital, variety of demand etc. May be with some clever network + a lot of dealing we may see a few stores around Maharashtra (favorable demand + party in power), and MP (favorable sourcing) in pockets. That said FCPA norms could be a bigger show stopper than anything else at least for US listed entities trying to invest in India. Kiranas will still thrive and their inefficiencies are solvable at their scale, without any stimulus from government.