Indian Government Introduces Bill to Liberalise Retail Sector FDI

Landmark Move to Further Open Up Retail Sector to Foreign Participation

The cabinet of India's Congress Party-led United Progressive Alliance (UPA) coalition government last night (24 November) approved foreign retailers owning up to a 51% stake in multi-brand retail sector firms. It also allowed 100% foreign ownership in single-brand retail firms, up from the previous 51% cap. Until now, foreign firms were only allowed ownership of up to 51% in single-brand retail companies, and 100% ownership was restricted to wholesale and cash-and-carry operations.

Details of the new rules were not available on Friday morning, and were expected to be formally introduced in Parliament later today (25 November). However, the government was prevented from doing so by frenzied protests in the Lok Sabha—the lower house. Murli Manohar Joshi, a leader of the opposition Bharatiya Janata Party (BJP), was quoted by Agence France-Presse as saying that the move will "will instantly kill all small traders", referring to the small, often dilapidated retail outlets on which the livelihoods of a vast swathe of India's middle-class rely. International supermarket chains pose an obvious threat to these businesses, but nationalism is not the issue: even India's giant industrial houses have struggled against opposition to their entry into the retail sector (see India: 15 May 2011: Reliance Counts Cost of Trader Backlash in India).

The impact on the UPA's popularity and longevity could be severe, as IHS noted in July (see India: 25 July 2011: Indian Government Panel Approves Plan to Allow FDI in Retail Sector). It is not only opposition parties who are against the move. West Bengal's ruling Trinamool Congress, a member of the UPA coalition, joined the opposition parties in vocally opposing the plans in parliament, with Railway Minister Dinesh Trivedi, a member of the party, saying that his objections had been overruled in the cabinet meeting. Reportedly, Finance Minister Pranab Mukherjee told him that he was welcome to obstruct FDI in his own province but should not demand the same across India.

It is likely that certain conditions will be attached to the liberalisation. Foreign investors may have to invest a minimum of USD100 million to set up multi-brand retail operations. At least USD50 million of the investment is to be invested in back-end operations such as food-processing units and warehouses, as well as supply-chain measures, among others. The back-end cannot include investment in land and rental properties or front-end stores. Retailers must also source at least 30% from small-scale industries. There are also likely to be restrictions on where retailers can operate, probably limiting their presence to cities with a population of more than one million—India has about 42 such cities at present. Meanwhile, the government is to have the first right of procurement of farm produce, thereby protecting farmers and government stockpiles.

Multi-brand foreign groups such as Wal-Mart (US) and Carrefour (France) are currently restricted to operating in joint ventures (JVs) as wholesalers in India, prevented from selling directly to the public. The vast majority of consumers currently shop at small local markets. Now, with an Indian partner, they will be able to open department stores and supermarkets. Meanwhile, single-brand sellers such as Nike, Starbucks and the Gap can now be exclusively foreign-owned, instead of requiring an Indian partner to operate in the country.

Outlook and Implications

The Congress-led UPA government has been seeking to fend off charges of policy paralysis after being engulfed in a string of corruption scandals in recent months. Opening up the retail sector had become a litmus test of the government's commitment to implementing the second phase of economic reforms, originally kick-started by Prime Minister Manmohan Singh, then India's finance minister, in 1991. The decision was seen as a sign of the UPA's intention to press ahead with its reformist agenda despite strong political opposition. Global multinationals have lobbied for years to sell directly to consumers in India, seeking access to the country's estimated USD500-billion retail sector.

Certainly, investor sentiment has taken a hit in recent months. Total FDI fell 28% to USD29.4 billion in fiscal year (FY) 2010/11 (which ended in March) as India's economic prospects turned gloomier. IHS Global Insight now forecasts GDP growth for the current FY 2011/12 to come in at only 7.3%, down from the government's exuberant forecasts last year for 9% growth. Meanwhile, global uncertainties and worries about India's own current account and economy have led to the Indian rupee weakening to record lows against the US dollar. Opening up the retail market, while sending the message of the government's willingness to introduce big-ticket reforms, could help bolster investor sentiment and jump-start the economy.

India's organised retail market—that is, chains of stores rather than independent, family-run shops—is estimated at about less than 5% of the overall market, with the rest characterised by smaller "mom-and-pop" stores. The low base provides substantial potential for growth to reap the benefits of economies of scale in large retailing. It is estimated that there are 15 million small shops, almost of all of which are considered too small to offer the choice or discounts that global multinational retailers can.

Opposition among these small shop keepers could damage the UPA's chances at the 2014 general election. Macro-economic growth has to date had little electoral purchase with India's masses, as the BJP found out to its cost in 2004 when its "India Shining" election campaign, which focused on the party's economic record, resulted in a surprise national defeat. The BJP is likely to exploit the retail issue to damage a government already tarnished by its corruption record.

Predictably, global retailers, such as Wal-Mart, Carrefour and Tesco (UK), which have long-advocated liberalisation, are delighted. Raj Jain, chief executive officer of Bharti Wal-Mart, said the company is "grateful" and that it would extend its back-end JV with Bharti Enterprises to the front-end as well. Jain stated that Wal-Mart is "willing and able" to invest in back-end infrastructure that would help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation.

Allowing foreign retailers to have stakes of up to 51% in multi-brand department stores and supermarkets would attract much-needed capital from abroad and ultimately would help unclog supply bottlenecks that have kept inflation stubbornly close to a double-digit clip. Consumers will see better and cheaper purchasing options. Farmers and suppliers will see better prices and larger orders, taking advantage of scale. The retail sector could lead to a significant transformation in India's manufacturing and farming segments. International retailers, faced with extremely low growth and stagnating economies in industrialised countries, will look at India and its vast and growing market as a great opportunity. For Indian retailers, foreign investment could bring welcome cash through foreign investment to expand and revamp their operations. For the economy as a whole, the move will result in injections of fresh investment and new jobs, and lower retail prices. Improved competitiveness and efficiency will help recharge the retail sector.

Opening up FDI in the retail sector for multi-brand retail is likely to result in a dramatic increase in retail-sector growth. The move is expected to spur a retail rush and could potentially transform not only the retailing landscape but also the nation's poor infrastructure. Liberalisation would involve an increase in input of capital, technology and new management practices, which could reform the whole retail business chain. The reforms will also help tamp down rising food prices and inflation by improving consumer choice and prices, and increasing the efficiency of the agricultural sector.