Multi-brand FDI in retail can be a stepping stone for the rural infrastructure growth, in spite of some mandates that hinder the smooth implementation of the programme.
Infrastructure may not be the biggest gainer as a result of the recent liberalisation of retail and aviation. Yet, both in terms of actual construction and "back-end infrastructure" activity as well as now-sagging investments, the sector will see an upturn when retail giants enter the country.
The most direct, although the longest-term, factor for an infrastructure boost will be from strengthening the food chain itself. At least 50 per cent of the investment in multi-brand retail through FDI is mandated to be in providing "back-end infrastructure" within the first three years-investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehousing, agriculture market produce infrastructure etc. This provision will finally bolster the languishing produce-market linkages and rural infrastructure, while also opening up opportunities for the Indian agriculture sector to compete globally.
While it is unclear whether such infrastructure can eventually be put up for sharing, the government could start examining that possibility for viability purposes and to position a carrot at the end of the gestation tunnel for investors. Experts say the government must be careful while placing constraints to be aware of investor’s needs and feasibility.
"Specialised agencies and service providers (such as third-party logistics) will make part of these investments in the back end [infrastructure]," says an expert in response to a questionnaire floated for discussion in 2010 by the Department of Industrial Policy and Promotion. The policy therefore should incentivise and monitor the total collective backend investments being made, without being overly concerned about who is making those investments individually."
The policy is also unclear on whether investors can build the agricultural infrastructure in regions away from the cities where the retail outlets will be established. Currently, only cities with population above 10 lakh are permitted to have these outlets, and states have the last say in implementing FDI in retail. Whether a company can invest in an outlet in one state while the backend systems can come from one or several other states may be a critical rider while detailing the policy. The government has the first right to procure the produce, and this may also prove to be an issue that leads to uncertainty in private procurement. Some sections of the media have been sceptical as to whether this is a policy note more in theory than in practice, and whether the industry needs to celebrate with caution.
Attracting private investment in the rural sector has not been a success so far. As reported in Infrastructure Today earlier (February 2012), the Planning Commission has identified food grain storage gap of a whopping 1.5 crore tonne. The government has been struggling to close this gap through a few measures in recent times such as the Private Entrepreneurs’ Guarantee Scheme for food grain storage and through the National Horticulture Board to create cold chains. The recourse available to the government so far has been limited, since private entrepreneurs have not exactly warmed up to rural logistics and infrastructure. While sensible schemes such as Provision of Urban Amenities in Rural Areas (PURA) will gather some traction and momentum over the medium and long term, getting foreign investors in food-related retail in the food chain infrastructure may prove to be the kick start that the segment badly needs in the direction.
Secondary effects of the FDI note may actually precede the primary ones chronologically, since a slew of reforms in a burst herald international investor attention. Member of Parliament (INC) Shashi Tharoor told Infrastructure Today that while "it is too early to tell" whether the decision to allow FDI in multi-brand retail and aviation will provide a much-needed shot in the arm of the infrastructure sector. However, he said, it is certain that the decision will create an environment of confidence among overseas investors in infrastructure and other sectors, easing worries about a paralysed government and a sagging economy.
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