Government in India may allow foreign direct investment in mono-brand retailing

India’s government is considering allowing foreign companies to completely own single-brand retail stores in the country, after it had abandoned project to permit foreign investment in multi-brand retailing, due to lack of political consensus.

At present, only 51% foreign direct investment, or FDI, is allowed in mono brand retail and the industry ministry is now looking at a proposal to raise this limit to 100% as it seeks to send a positive signal to foreign investors. “We have discussed the proposal internally and it was even put up before a joint government-industry task force,” a government official told Economic Times of India.

The move to raise the FDI limit in mono brand retail is being accompanied by a tightening of norms for the sector. In its update of the FDI policy issued on September 30, the government has mandated that the foreign investor must own the brand that it intends to retail in India. This is to ensure that franchisees of brands do not take advantage of a more liberal investment regime. Ironically, while the government now seeks to appease global investors by possibly hiking the FDI ceiling, the decision to allow foreign investment in mono-brand retail a few years ago was meant to be the first step towards the eventual opening up of the entire retail sector to foreign competition.

The measure will boost the Indian luxury market especially the sectors of fashion and accessories, the limitations on foreign direct investment being one of the major factors behind the sluggish development of the Indian luxury market. However, the biggest stake of the change in legislation is by far on global retail chains such as Walmart, Tesco and Carrefour which have been impatiently waiting for several years to open stores in India.  Last week, on his way back from the US, Prime Minister Manmohan Singh said FDI in multi-brand retail would be allowed only after a consensus is reached.