FDI in Multi-brand Retail to benefit Food Processing Industry in India

"Maharashtra and Andhra Pradesh would be the biggest beneficiaries of the new retail FDI policy"

Dr. Samantak Das,
National Head - Research,
Knight Frank India

The Government of India intends to boost the food processing sector and thereby increase the processing level of perishable items, reduce wastage, increase value add and enhance the country's share in global food trade to 3 per cent from the current share of 1.5 per cent. The food processing industry employs over 16 per cent of total workforce in the organized manufacturing sector and 32 per cent of the workforce in the unorganized sector. Employing around 13 million people directly, the sector has the potential to generate significant direct and indirect employment.

At present, 100 per cent FDI is allowed in development of food infrastructure like food parks, cold chain and warehouse, which constitute the backend of the sector. However, over the last decade until April 2011 this sector attracted a meager USD 1,253 million or less than 1 per cent of total FDI inflows in the country.

The processed food category has immensely benefitted from the upsurge of modern retail and urbanization wave witnessed over the last decade. Therefore, any step in this direction has an indirect but cascading impact on the food processing industry as well. One such step being the central government's proposed policy to allow greater foreign participation in multi brand retail. There were restrictions on foreign investment in retail sector. Now that the government is likely to relax the restriction on entry of foreign players by allowing 51 per cent FDI in multibrand retail and 100 per cent in single brand retail, the beneficiaries will range from the food processing industry to the real estate industry.

Offering a potential to drive the rural economy, the food processing industry will serve as the link between agriculture and modern retail. While modern retail will hit at the right place by reducing wastage, increasing competition, better products at lower prices; market forces will have upper hand rather than the middlemen, leading to curb on hoarding and increased transparency.

Although the government estimates 53 cities having a population of a million and above to benefit from the proposed policy, retail trade being a state subject implies that states that acknowledge the policy will be the biggest beneficiaries. In this context, we estimate that Maharashtra and Andhra Pradesh would be the biggest beneficiaries of the proposed FDI policy. Further, the food processing industry in Maharashtra and Andhra Pradesh alone will create a land requirement of 5,000 hectares in the next 5 years. While some states have shown initial resistance towards the policy, eventually they would succumb to the fear of losing the merits of this reformative policy development.

Q. As per the latest data released by the DIPP, the Indian Real Estate and Housing sectors received US$ 453 million in FDI during the period April-September 2011-12. Given the economic slowdown seen in developed nations, what trend you foresee in FDI inflows in the near future?

If we are talking about total FDI, we observe a slowdown. Though the FDI inflows figure between May 2011 and June 2011 indicate rise, thereafter we are seeing a slowdown. I don't want to go into month over month analyses. The overall trend is not an encouraging one. It is declining.tates.

Q. How long you think the falling trend will continue?

Basically, FDI is a long term investment. We started the year 2011 with a positive note with all economic indicators including the GDP growth projected to be on the higher side. Now, that we have revised growth indicators drastically downward. As a result the general perception is on a weaker side and it will remain so at least till March 2012. The FDI scene in the real estate is not any different. The main reasons for this is the low sentiments amongst the investors; image of India in general and of that of the Real Estate sector in particular is not really very strong enough to attract huge amount of FDI. The less transparency in the Real Estate dealings is not helping in attracting FDI on large scale. The biggest concern is over the availability of factual data, as different sources quote different figures for same parameters.

Q. Has it in any way shaped the confidence of the people?

Absolutely, in order to flourish, the Real Estate sector has to gain confidence of the investors be it foreign or domestic investors; small or big investors. A lot has to be done to gain the confidence of project investors.

Q. The Union Government has released Draft Real Estate Regulation Bill 2011, to provide guidelines to facilitate growth, promotion of healthy and transparent competitive Real Estate sector in the country. How far this bill will be able to regulate the sector?

We are very pro on regulatory bill. In my opinion, the bill will help to overcome shortcomings of the existing system in the real estate market. Well, presently the buyer's interests are frequently compromised not only by the promoters but by the government as well. The draft bill is partially addressing this issue.

On the flip side, the bill takes into account only the developer. But there are other stakeholders as well. Further, the emphasis is more on regulation of the Real Estate sector rather than the development. Actually the focus should be Regulation and Development, for I think, development is the need of the hour. Many important stakeholders of the Real Estate sector such as brokers, sanctioning authorities of the government, registrars were all kept away from the ambit of the bill. On the positive note, the bill makes it mandatory for builders to register their projects and update the developments on the project on the regulator's website. Further, he has to deposit around 70 per cent of the amount realised on a particular project in a separate bank account earmarked for that project only. A builder is free to use only the balance 30 per cent for other activities. Currently, it is not the case. This will definitely build confidence in the customers to invest more in the Real Estate sector. Eventually the economy will also benefit. I always maintain that the Real Estate sector is one of the growth engines of the Indian economy.

Q. What are your views on demand and supply situation?

There is always adequate 'Need' for residential units in India. This need can be translated into demand only if products are positioned within pricing ranges, location, etc. So assessment should be the focus of the developers while providing supply. In addition, role of the government is of great importance as a facilitator to provide adequate infrastructural facilities.

Q. The RBI has raised its key lending rate 13 times since March 2010 to tame persistently high inflation. The Real Estate developers have already started complaining about the adverse effect of the dear money. What is your take on this issue?

I have a strong opinion on this. One thing is very clear from the observations of the RBI policy towards controlling inflation. The 13 times policy rate hike by RBI, according to me has not been very effective in controlling the inflation. For the past 11 months the headline inflation is hovering around nine to ten per cent. "Inflationary expectations definitely have reduced because of policy. Interest rate hikes is ineffective beyond a point." To control this kind of inflation, the government should concentrate on the supply side constraints and supply side reform measures. Without effective measures it is very difficult to bring down inflation in India.

In order to ensure timely delivery, real estate players are trying to provide new technologies like 'slip form construction', 'pre-fabricated construction' and 'dry-wall technique' which will add to the construction cost. What will be the impact this? Technology is important in the Real Estate sector because cost effective measure will definitely reduce time. Use of high technology will not only reduce time but will also lead to price reduction. Usage of high technology will slowly take off. The current labour constraint in the Real Estate sector is forcing the developers to mechanise the construction procedure.

Q. What about the green building concept?

How much is being done by the developers in this aspect? Green building and usage of green technology is relatively higher in office structures than in the residential segment. Efforts are on, but its too early to say anything. We've just started. We've to make people aware and awake consumers to accept it. It may be good for the developers and stakeholders but what about the buyers? Awareness of long term benefits should be generating amongst the customers to get higher benefits in future.

Q. What is your outlook on Real Estate sector in India for the year 2012?

It won't be worse. It would be more or less same. Entire environment is the same. The office market is majorly dependent on domestic as well as global economic activities. The major demand for office places will be from large corporate houses. Unless the global economy stabilises there is not going to be any phenomenal upsurge in demand for office spaces. It will remain stable. Residential is dependent on sentiments. If the sentiment changes due to greater economic outlook, we may see some upward movements in the residential sector.