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Giant e-tailer Amazon has received permission in India for some food-only stores. The $515m deal is likely to spark similar action by local online grocery companies, as N Chandra Mohan reports.

On July 10, the Indian government gave the nod to Amazon to open bricks-and-mortar stores selling food products. This is India’s first FDI proposal for setting up food-only retail outlets as well as the first to be cleared after the Foreign Investment Promotion Board was abolished in May.

Amazon proposes to invest $515m to take pole position in the world’s third largest grocery market. Indian online services Grofers and Big Basket could be the next to get the go-ahead for setting up food outlets, making a total of $695m in proposed investments by these three players. 

Although the government permitted 100% FDI in multi-brand food retail in June 2016, the interest from global majors has been lukewarm until now. To begin with, sale of food-only items entailed low margins; accordingly, companies sought to stock non-food items as well to make the business viable. The food products had to be produced, processed or manufactured in the country.

But Amazon has decided to enter this business, as it has done with its Amazon Fresh outlets in the US and UK. It entails huge investments in building a food supply chain and cold storage facilities in India. 

Certainly, the greenlighting of Amazon’s FDI proposal to retail food items offline or online to customers anywhere in India comes with strings attached. The government has reportedly asked Amazon to keep its food-only retail business separate from its existing flagship marketplace business, where firms are not allowed to sell products directly to customers. This could entail setting up separate companies, boards, staff, bank accounts and inventories, according to the Economic Times

Besides Amazon, the government is also fast-tracking 70 pending FDI proposals, of which five pertain to single brand retail, 14 are in pharma and eight are telecom-related. Further liberalisation of up to 100% FDI in multi-brand retail is also being contemplated, which means that the global majors can set up shop without a local partner. This comes with the condition that retailers only sell goods produced in the country, and invest at least $50m in storage and logistics infrastructure. Allowing 100% FDI in single-brand retail on the automatic route is also being considered.

N Chandra Mohan is an economics and business commentator based in New Delhi.

This article is sourced from fDi Magazine
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