There have been some setbacks but the Indian government will continue to push for economic reform
(3 February 2012) — India is a nation of shopkeepers. Retailing accounts for 15% of its gross domestic product, employs 40 million people, and at US$450 billion, is one of the top five retail markets in the world. No wonder global retail giants want to get a foot in the door.
But the country is also keen to protect its millions of small retailers. Politicians and the public are divided on whether letting major foreign retailers into the market would destroy jobs or boost the wider economy. The government, led by economic reformer Prime Minister Manmohan Singh, believes that retail liberalisation is a necessity. Opposition parties disagree — perhaps playing to local fears of jobs losses. Single-brand retailers like Ikea were, until recently, required to set aside 49% of their equity for local investors. For now, the big multi-brand retailers, such as Walmart and Carrefour, are entirely barred.
Just last week, the government announced its decision to formally clear the decks for full equity ownership — up from the earlier 51% investment cap — in the single-brand retailing sector. This would set the stage for global single-brand retail firms to proceed with investments in the country.
“Globally, single-brand retail follows a business model of 100% ownership and global majors have been reluctant to establish their presence in a restrictive policy environment,” the department of industrial policy and promotion said when announcing the move. But foreign firms still have to meet 30% of their sourcing needs through local suppliers.
For Ikea, this requirement is an obstacle to the company’s expansion into India and needs reviewing, company chief executive, Mikael Ohlsson told the Financial Times.
Single-brand retail accounts for 25-30% of the US$26 billion organised-retail market in India and will grow to about US$20-25 billion in five years, according to Technopak Advisors, a retail consultancy firm.
In the past year, India has liberalised foreign investment regulations in many of its key sectors. The foreign ownership limit in public-sector refineries, for example, has been raised to 49% from 26%. The government also decided to allow commodity exchanges up to 26% in foreign direct investment (FDI) and 23% in foreign indirect investments, provided no single entity holds more than 5% of the stake.
Sectors like credit information companies, industrial parks, and construction and development projects have also been opened up to more foreign investment. Keeping India’s civilian nuclear ambitions in mind, India has also allowed 100% FDI in the mining of titanium, a mineral abundant in the country.
Also, in another major announcement, the government of India on January 17 announced that foreign airlines will soon be allowed to acquire a stake of up to 49% in domestic carriers — leading to the likes of AirAsia expressing an interest in launching an Indian subsidiary.
And on January 26, the government removed a mandatory clause that investments once announced, cannot be cancelled for three years. Foreign firms will be encouraged to look more closely at investing in India if they know their investments will not be tied up for a minimum period of time.
The slew of reforms would give the impression of a reform-obsessed government on overdrive. But the truth is more restrained. The recent decision to allow 100% FDI in single-brand retail is part of a wider government effort to push its economic liberalisation programme, which began in 1991.
Riding on measures by the government and the central bank, overall FDI into India in 2011 was US$26 billion compared with US$19 billion in 2010. And according to a recent Ernst & Young report, FDI in India is set to soar, even as investors struggle to come to terms with a lack of transparency, poor infrastructure and policy paralysis. The report also noted that overseas investment in Asia’s third-largest economy rose for the first time in three years in 2011, as global investors put their faith in rising salaries, an expanding middle class, and a large and cheap labour force.
Despite the progress, liberalisation of the multi-brand retail sector remains a thorny issue because of the size of the market and the potentially wide-ranging social impact. Any decision on multi-brand retail would affect much of India, from the man on the street to the conglomerates. Foreign multi-brand retail giants would be able to sell to most of Indian’s 1.2 billion people.
Small-shop owners, who account for more than 90% of India’s US$450 billion retail sector, oppose the entry of foreign players. They fear that they would be put out of business.
Supporters of liberalisation, such as the former US ambassador to India Timothy Roemer, believe that opening the sector to foreign investors would create millions of jobs for local Indians. Infrastructure would improve, food prices would drop and there would be more opportunities for associated small and medium enterprises as well.
During a meeting with global retail heads at the World Economic Forum in Davos, Indian Commerce Minister Anand Sharma told delegates that the desired 51% foreign ownership of multi-brand outlets “could not be implemented because of the compulsions of coalition politics and also partisan opposition. It is just a pause. The decision has only been put on a temporary halt”.
This is the first time US and German retail executives have met Indian ministers after the government was forced to suspend its plans last December. The government has reportedly restarted the consultation process with political and economic stakeholders, in a fresh attempt at opening up multi-brand retail to foreign investment.
With sagging consumer demand in the developed economies, India is fast becoming one of the most attractive untapped markets for the global retail giants.