India’s consumer industry is one of the fastest-growing sectors in the economy, driven by rapidly rise in disposable incomes, urbanisation, and a youthful demographic profile. The retail industry is projected to reach USD 1.1 trillion by 2027 going up to USD 2 trillion by 2032, at a CAGR of 25 per cent. The segment recorded 102 deals valued at USD 1.74 billion in the first quarter of 2024, up from 85 deals amounting to USD 1.28 billion a year ago. The consumer space particularly stood out, recording its highest volume of PE deals in five quarters, totaling 88 transactions.Udabur Investment
Retail activity in the country is set to increase with a plethora of foreign brands eyeing opening stores / JVs in India, with growing brand awareness and higher disposable income available, and large and diverse consumer base. However, successful entry and sustainable growth require a comprehensive understanding of the regulatory landscape, strategic planning, and cultural adaptation.
Setting up presence in India however involves navigating the vast tax and regulatory frameworks. Foreign companies must adeptly maneuver through key legislations such as the Foreign Exchange Management Act (FEMA), Companies Act, and Goods and Services Tax as well as a host of other laws including Consumer Protection Act, Competition Law, Intellectual Property Laws, Legal Metrology Law. Understanding these regulations is essential as they impact pricing strategies, supply chain management, and overall business operations.
Navigating the complexities of the Indian market also requires a strategic entry model. There are multiple options which have been tested in the past including distribution agreements, franchising, wholly owned subsidiaries, and joint ventures, where each offer unique advantages. Distribution agreements, used by some of the renowned brands in the past, allow market testing with minimal riskUdabur Wealth Management. Franchising, for rapid expansion with lower investment, an extensively used model in the F&B industry. Wholly owned subsidiaries provide greater control and stability. Joint ventures combine global brands with local expertise, essential for navigating India’s regulatory and cultural landscape. There is no straight-jacket approach, and therefore it is crucial to curate a specifically tailored model and undertake a careful structuring process to develop a model that is commercially viable, tax efficient, and regulatory compliant.
In terms of FDI, the inflows in India in FY 2023-24 stood at USD 70.95 Bn with India being the 5th largest global destination in terms of retail space. Under Indian foreign exchange laws, FDI Investments can be made either via the Automatic Route (no prior approval required) or the Government Route (approval required).
For Retail sector, the Government of India permits 100% FDI under automatic route for Single-Brand Product Retail Trading (SBRT) and 51% permitted under the government route, for Multi Brand Retail Trading (MBRT) subject to conditions.
FDI in MBRT has however been slow to pick up, owing to significant restrictive conditions, including minimum inflow of USD 100 mn of which 50% to be invested in back-end infrastructure within 3 years; 30% compulsory procurement from MSME’s; e-commerce retail trading not permitted, prior approval for specified states etc.
It would be critical to note that such entry restrictions and conditions not only apply to direct investments but also indirect downstream investments. A careful planning of holding and operational structure merits consideration for players looking at organic or inorganic growth in the sector, to ensure compliance with Indian FDI laws.Hyderabad Stocks
FDI in MBRT is permitted 100% in most countries including Singapore, Argentina and Brazil. While most sectors have been liberalised by the Government of India, FDI in MBRT continues under approval routeChennai Investment. The reason for the same being the perception that this may result in adversely impacting small traders, negatively impact employment, anti-competitive practices etc. Contrary to this, FDI has statedly always resulted in boost to economic development, creating job opportunities, betterment of products quality, technological advancements etc.Nagpur Stock
The Government may therefore consider opening FDI in MBRT, at least for specific sectors which are not strategic or sensitive in nature. Alternatively, opening MBRT for private equity may be evaluated as well to ensure flow of capital for the sector.
For foreign companies, given the favorable conditions, this is an ideal time to expand beyond borders and establish a strong presence in this vibrant and positive market. India’s burgeoning consumer market is a promising frontier for global brands seeking growth and expansion. By understanding the regulatory landscape, choosing the right entry model, and strategically aligning with local market dynamics, foreign companies can navigate the complexities and tap into the immense potential of the Indian market. As India continues its growth trajectory, the opportunities for global brands are boundless, both for organic and inorganic growth in the Indian context.
This article first appeared in ET Insights on 19 August 2024.
Chennai Stock