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Retail FDI confronts twin hurdles

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By R. SURYAMURTHY
  • Published 28.11.11
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New Delhi, Nov. 27: Global retail chains looking to set up shop in India may face several challenges such as delay in the implementation of goods and services tax and restrictions imposed by the Agricultural Produce Marketing Committee (APMC) Act, besides political opposition.

These hurdles can be roadblocks in providing real benefits to farmers and consumers as intended by the government in opening the multi-brand retail sector to foreign direct investment.

“GST (goods and services tax) will reduce the tax incidence and complexities of doing business. It will remove inefficiencies in the logistics and taxation system,” Kavish Sarawgi, director of consultancy firm Resurgent India, wrote in a research report.

GST will replace central and state taxes such as excise, customs, service tax, sales tax and VAT with a uniform country-wide value-added tax on all goods and services to be shared equally by the Centre and states.

The government had introduced a Constitution amendment bill in the Lok Sabha for rolling out GST, but it is yet to win the support of the Opposition parties, especially the BJP, to pass it in Parliament. The states opposing GST fear losing fiscal and financial autonomy under the proposed regime.

The bill cannot become a law without two-thirds majority in Parliament as it involves constitutional amendments.

Big opportunity

According to a study by Boston Consulting Group and the CII, the current size of organised retail in India stands at around $28 billion, or 6–7 per cent of the total retail market.

The retail market as a whole is estimated to grow to $1.2 trillion by 2020, of which 21 per cent will be organised. With added investments from key overseas players, the sector would have the potential to significantly impact the Indian economy, the study said.

Analysts said a large chunk of foreign investment would be used to expand the food and grocery category that constitutes about 35 per cent of total retailing. Other categories to benefit are fashion and lifestyle.

Sarawgi said organised retail suffered on account of value-added tax as unorganised players rarely paid it. Organised retailers pay 10.3 per cent service tax on lease rentals, which can be set off once GST is implemented and this can lead to benefits of up to 0.5 per cent of sales.

Further, lack of investment in logistics is creating inefficiencies in the food supply chain. “Though 100 per cent FDI in cold chain through the automatic route has been allowed, the sector has not attracted major investment because of the absence of FDI in front-end retail,” commerce minister Anand Sharma said.

Supply chain

“Inter-state taxes such as central sales tax (2 per cent) result in retailers having multiple warehouses to reduce taxes and repeated loading and unloading of goods which not only increase the lead time but also the cost of goods. GST implementation will result in the realignment of the entire supply chain system, reducing storage, handling and transport cost for organised retail,” Sarawgi said.

A recent KPMG study on the impact of GST on the transportation and logistics industry has pointed out that the new tax regime could see a lesser number of warehouses but of larger sizes.

“This will translate into expansion of some of the existing warehouses, development of new ones and the shutting down of several existing facilities,” it pointed out.

Major reform

Another major hurdle faced by organised retail is the APMC Act. The commerce minister said, “It is expected that progressive states will undertake gradual reform of the Act which will ensure direct procurement, at least of horticulture produce from farmers to enable them to secure remunerative price.”

At present, agricultural produce can be moved out of an area only by agents who own licences issued under the APMC Act.

“The implementation of GST and changes in APMC will benefit the organised retail sector in providing the intended benefit. So far, organised retail has tried to work with it, though APMC is a constraint,” Saloni Nangia, senior vice-president at consulting firm Technopak Advisors, said.

An inter-ministerial group headed by chief economic adviser Kaushik Basu had recommended that the APMC Act ought to be amended to enable farmers to bring their products to retail outlets and also allow retailers to directly purchase from farmers.

“The APMC system has abetted monopolistic behaviour and reduced the choices available to small farmers. Unwittingly, the well-intentioned APMC law has contributed to helping cartelisation and collusion among incumbent traders. The need, therefore, is to revisit the APMC Act with this in mind,” it said.

A model APMC Act was finalised in 2003 and was circulated to the state governments for implementation in 2007. Since then, a few states have amended the act and only a few such as Punjab, Haryana and Himachal Pradesh have relaxed their procurement laws.

A World Bank study said farmers get only one-third of the total price paid by the final consumer against two-third with a higher degree of retail. The study also states that the average price a farmer receives for horticulture produce is barely 12-15 per cent of what is paid at the retail outlet.