It has also tweaked the sourcing norms for FDI exceeding 50 per cent in single brand retail, requiring foreign firms, which want a relaxation of the 30 per cent procurement norms, to set up manufacturing facilities in the country.
After considering various aspects and discussions with various stakeholders and states, it has been decided to go ahead with the decision to allow 51 per cent FDI in multi-brand retail, Commerce and Industry Minister Anand Sharma told reporters after the Cabinet meeting chaired by Prime Minister Manmohan Singh.
"The response has been a mixed one but the UPA had tried to evolve a consensus," he said.
The cabinet had in November last year approved 51 per cent FDI in multi-brand retail but had to put it on hold due to opposition from political parties, including UPA ally Trinamool Congress.
Sharma also reiterated that foreign retailers planning to enter the multi-brand segment would have to invest a minimum of USD 100 million with 50 per cent of it in rural areas.
The Minister said the firms will also have to source 30 per cent of their products from Micro and Small & Medium Enterprises where FDI is 51 per cent and above.
Under the norms, 50 per cent of total investment will have to be invested in 'backend infrastructure' within three years of the induction of FDI.
"As far as the urban areas are concerned, they will be allowed to open stores only in cities with a population of more than one million, while in the case of hilly states, it will be up to the respective state governments," Sharma added.
For single brand, the Cabinet decided that any firm seeking waiver of the mandatory 30 per cent local sourcing norms would have to set up a manufacturing facility in the country, the minister added.
This will help, in particular, foreign watch makers and textile manufacturers who want to enter India on their own, he added.
Swedish retailer IKEA, which planned to invest Rs 10,500 crore in India, had sought relaxations in clauses related to the 30 per cent sourcing norms from small and medium units.
In November last year the government approved 51 per cent FDI in multi-brand but was put on hold.
The notification for implementation of the decision is expected by the end of this month.
The decision paves way for global retail giants WalMart, Carrefour and Tesco to open retail stores in India under their own brands.
At present WalMart has a 50:50 cash and carry joint venture with Bharti Group, while Carrefour runs wholesale stores. Tesco, on the other hand has a tie-up with the Tata group and supports the Indian firm in the running of Star Bazaar chain of retail outlets.
Welcoming the development, Future Group founder and CEO Kishore Biyani said: "FDI in multi brand retail is a welcome step. It will help in creation of more job. People will realise it is a win-win for all".
Expressing similar views, Bharti Enterprises Vice Chairman and Managing Director Rajan Bharti Mittal said: "This is a landmark decision in India's economic reforms process.
Development of organised retail in India will bring immense benefits to stakeholders across the value chain - from farmers to small manufacturers and above all to consumer".
Ernst & Young Partner Paresh Parekh said the move is one of the boldest steps and both global and domestic retailers will be going back to drawing boards to explore joint ventures.
SAMIRAN CHAKRABORTY, REGIONAL ECONOMIST, STANDARD CHARTERED BANK, MUMBAI
These measures were pending for a long time and the government has now shown political courage to push things through. The process of clearing all these got delayed and it is just that all are coming together.
As an immediate impact, business and consumer sentiment will improve, stock market will improve. But I don't think RBI will cut rates after these measures because the impact of these steps on supply side will only be in the medium term.
The government's intention is to pacify rating agencies or convince them that government is taking the right steps. This should buy some time and rating agencies may wait for the final fiscal deficit number before deciding on India's rating.
KISHORE BIYANI, CHAIRMAN, FUTURE GROUP, MUMBAI
We are hoping this time the government will stick to its decision (allowing FDI in multi-brand retail) because that is absolutely essential.
The decision to let individual states decide on whether they want it is a good decision. This should satisfy people who are opposing it. The industry is convinced once a few states implement it the others will see the benefits and definitely consider it as well.
PRAVEEN KHANDELWAL, GENERAL SECRETARY, CONFEDERATION OF ALL INDIA TRADERS
It is unfortunate that despite opposition from their own allies they have chosen to again reopen foreign investment into the sector. It is surprising the government has again reopened the sector without announcing any solid measures to protect small traders.
We will oppose this move even more strongly this time and are hopeful the government will roll back its decision just the way they did last time.
SHARAN LILLANEY, AVIATION ANALYST, ANGEL BROKING, MUMBAI
FDI in aviation has always been approved, this is just an approval for foreign airlines. This was not something out of the extraordinary, so there is no question of it being reversed.
I don't think there will be a flurry of investments, but airlines in better shape will definitely see interest from foreign airlines, such as SpiceJet, Indigo or Jet.
There are a lot of people interested.
TAINA ERAJUURI, FUND MANAGER, FIM ASSET MANAGEMENT, HELSINKI
This is a great news. I have been waiting for a long time and I had almost given up.
Foreign investors were getting fed up with India because nothing was happening there. People would now feel more comfortable to see at least some of the reforms measures going through.
HARISH AGARWAL, BOND DEALER, FIRST RAND BANK, MUMBAI
The bond market is unlikely to react much ahead of the policy. The reform moves may prevent the rating downgrade or delay that for the next 3-6 months. The market will await the second half borrowing calendar to see how much the fiscal slippage is.
Personally, I still do not expect a rate cut on Monday but (expect) a 100 basis point cut in statutory liquidity ratio.
SUBRAMANIAN SHARMA, DIRECTOR, GREENBACK FOREX, MUMBAI
All the negativities on the rupee have been factored in. The diesel price hike will help address the fiscal deficit. All the negativities created will change by all this reform action.
The rupee should breach 54 to a dollar on Monday and I expect a 2-3 percent gain in the rupee from current levels. The rupee should move towards 53.20-53.50 to a dollar in near term.
SIDDHARTHA SANYAL, CHIEF INDIA ECONOMIST, BARCLAYS CAPITAL, MUMBAI
This is not a coincidence but looks like a gameplan to meet some possibly internally set deadline as the government might want to go back to the rating agencies and try to convince them with these measures. The reason for the timing also could be because the political cycle is coming to a close in a few weeks time with Gujarat elections in November.
The positive impact could be on stocks which should have a positive kickback impact on disinvestment and, therefore, fiscal consolidation. In a situation like this, improved sentiment will have a broad impact. I don't think the market will behave very negatively even if there is a marginal roll back because market will focus on the positive actions.
Retail stocks on fire
Retail stocks, including Pantaloon Retail, Provogue India and Koutons Retail, rose as much as 2-8 per cent on hopes the government will soon implement the decision to allow Foreign Direct Investment (FDI) in multi-brand retail sector. Shares of Future Group firm Pantaloon Retail jumped 6.92 per cent to settle at Rs 157.60, while Provogue India climbed 6.58 per cent to Rs 16.04 on the BSE.
Among others, Brandhouse Retails soared 7.99 per cent, Koutons Retail India gained 4.93 per cent, Shoppers Stop (2.78 per cent) and Tata Group retail firm Trent (2.29 per cent) also notched up smart gains.
"Buying activity picked up in retail stocks on back of hopes of the FDI decision," Inventure Growth & Securities Chairman & MD Nagji K Rita said.
The government had last year allowed 51 per cent FDI in multi-brand retail, but the same could not be implemented in the face of strong opposition from UPA allies, including Trinamool Congress.
Analysts also said a robust stock market rally pushed these stocks higher. The BSE benchmark Sensex ended 443.11 points higher at 18,464.27, a 14-month high on closing basis.
India to allow foreign supermarkets in major reform push
* India revives plan to open retail sector to foreign supermarkets
* Foreign carriers to be allowed stakes in Indian airlines
* Government likely to announce spending cuts, sources
* August inflation jumps to 7.55 pct, diesel hikes to push prices
* Protests flare across India against higher prices
(Reuters) - India opened its supermarket sector to foreign chains on Friday after months of dithering, pushing ahead with the boldest reforms yet in Prime Minister Manmohan Singh's government as it tries to revive the country's tottering economic growth.
The move allows global firms such as Wal-Mart Stores to set up shop with a local partner and sell directly to consumers for the first time, which supporters say could transform India's $450 billion retail market and tame inflation.
Singh's government ignored calls from political parties for a U-turn on a hike to heavily subsidized fuel prices announced on Thursday, and also approved a policy to allow more foreign investment in airlines as well as selling off stakes in major state-run industries.
India's inability in the past months to push through major reforms and ease its subsidy burden as growth slowed sharply has put it in danger of becoming the first of the big BRICS emerging economies to see its credit rating downgraded to junk.
Prime Minister Singh was credited as the economist who opened up India's economy in the 1990s, but since taking office eight years ago he has repeatedly put off or rolled back difficult economic decisions.
Singh will need resolve and the support of powerful Congress party boss Sonia Gandhi if he is to muster the political will to fight off a wave of protests from both political allies and the opposition over reforms seen as costing jobs and raising prices.
The supermarket policy was first announced last year but a political backlash forced the Congress-led government to put the measure on hold.