FDI in Multi-brand Retail to benefit
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"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.
Output Growth of the Food Processing Industry |
State |
Annual growth
in last decade |
Estimated annual growth
for 5 years until FY2016 |
Andhra Pradesh |
11% |
17% |
Gujarat |
16% |
18% |
Karnataka |
13% |
18% |
Maharashtra |
9% |
17% |
Tamil Nadu |
12% |
15% |
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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.
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“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”.
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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.
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Dr. Samantak has 14 years of experience in applied
economic research and has contributed to more
than 75 research projects, either as a project leader
or lead economist. He has worked in close
association with the Ministry of Industries, Ministry of
Commerce, Department of Telecommunications,
National Informatics Centre (NIC), Reserve Bank of
India (RBI), World Bank, World Wide Fund - India, the
European Union, various state governments, industry
associations and regulatory bodies of India. Presently
at Knight Frank, as National Head - Research, he
looks after the -research activities on pan-India basis.
These include publication of quarterly reports on
different asset classes, special reports on topical
issues and monthly tracking of macro-economic and
real estate indicators. A post graduate in
management, Samantak holds a Ph.D degree and his
thesis deals with housing finance issues, with a
special reference to the Indian scenario.
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