In depth analysis of FDI in Retail

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)
1 Hyderabad Andhra Pradesh 6,809,970
2 Visakhapatnam Andhra Pradesh 1,730,320
3 Vijayawada Andhra Pradesh 1,048,240
4 Guwahati Assam 963,429
5 Delhi Delhi 11,007,835
6 Faridabad Haryana 1,404,653
7 Srinagar Jammu and Kashmir 1,192,792
8 Mumbai Maharashtra 12,478,447
9 Pune Maharashtra 3,115,431
10 Nagpur Maharashtra 2,405,421
11 Thane Maharashtra 1,818,872
12 Pimpri-Chinchwad Maharashtra 1,729,359
13 Nashik Maharashtra 1,486,973
14 Kalyan-Dombivali Maharashtra 1,246,381
15 Vasai-Virar Maharashtra 1,221,233
16 Aurangabad Maharashtra 1,171,330
17 Navi Mumbai Maharashtra 1,119,477
18 Solapur Maharashtra 951,118
19 Jaipur Rajasthan 3,073,350
20 Jodhpur Rajasthan 1,033,918
21 Kota Rajasthan 1,001,365


Unfavorable territories/states

  City Unfavorable State/Territory Population (2011)
1 Patna Bihar 1,683,200
2 Chandigarh Chandigarh 960,787
3 Raipur Chhattisgarh 1,010,087
4 Ahmedabad Gujarat 5,570,585
5 Surat Gujarat 4,462,002
6 Vadodara Gujarat 1,666,703
7 Rajkot Gujarat 1,286,995
8 Dhanbad Jharkhand 1,161,561
9 Ranchi Jharkhand 1,073,440
10 Bangalore Karnataka 8,425,970
11 Indore Madhya Pradesh 1,960,631
12 Bhopal Madhya Pradesh 1,795,648
13 Jabalpur Madhya Pradesh 1,054,336
14 Gwalior Madhya Pradesh 1,053,505
15 Ludhiana Punjab 1,613,878
16 Amritsar Punjab 1,132,761
17 Chennai Tamil Nadu 4,681,087
18 Coimbatore Tamil Nadu 1,061,447
19 Madurai Tamil Nadu 1,016,885
20 Lucknow Uttar Pradesh 2,815,601
21 Kanpur Uttar Pradesh 2,767,031
22 Ghaziabad Uttar Pradesh 1,636,068
23 Agra Uttar Pradesh 1,574,542
24 Meerut Uttar Pradesh 1,309,023
25 Varanasi Uttar Pradesh 1,201,815
26 Allahabad Uttar Pradesh 1,117,094
27 Kolkata West Bengal 4,486,679
28 Howrah West Bengal 1,072,161


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.


On Authority Types

Especially in corporate functions, the talk of being “handicapped without authority but only more  responsibility” usually echoes in at least one meeting room daily. Governments and their structure teaches a thing or two about authority, for me the most important is the distinction between statutory authority and executive authority.

Statutory authority is usually independent of the government itself, i.e. the political party in power, an example could be the Telecom Regulatory Authority of India or the Securities and Exchange Board of India. They have certain key responsibilities like protecting interests of consumers, shareholders, investors and others, they set standards for transactions broadly, and they monitor adherence. They get their form from a legislation and they have a tribunal mechanism attached where disputes can be resolved. Resource needs for statutory authorities are usually small.

Executive Authority is usually part of a government and is controlled by the party in power. They execute simply, the Central Public Works Department is one such example. They take ” full responsibility for planning designing, estimation, evaluation of bids, finalization of contracts, defending arbitration and court  cases” but all within some statutory framework only. Resource need for this form of authority is huge.

Obviously to function effectively both are needed for the common good, issue within organizations and corporate functions is the confusion between what authority are we talking about among other minor issues like in dispute or lack of use how to deal and existence of competing standards.

Can we clarify when next time some one complains “responsible without authority” please.

And “empowered” means granting at least one type of authority.