India moves ahead with retail revolution

- How keen will global retailers be to come to India in the face of mass popular hostility? On the other hand, can they afford not to be selling to one of the world’s youngest, biggest and fastest growing populations of middle class shoppers?

 

The Indian government is moving ahead with plans to overhaul the country’s retail landscape with confirmation in early autumn that it is to allow retail FDI in multi-brand stores, despite ongoing opposition to the plans.

 

Retail FDI, foreign direct investment, in multi-brand stores was previously prevented in India due to the perceived impact it would have on the country’s small and sole-traders, who make up the majority of the country’s existing retail environment.

 

Full retail FDI in single-brand stores has previously been granted, but the decision to allow 51 percent investment by foreign firms in multi-brand stores grants the like of Carrefour and Walmart the opportunity to bring store formats more commonly seen in Western markets to India.

 

The decision does come with certain caveats though, such as the decision to permit retail FDI being placed in the hands of individual states. In addition, stores can only be opened in cities with populations in excess of one million, otherwise the location is defined by the local state, although preferably in the largest city.

 

Foreign retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than US$1 million, and will have to invest a minimum of US$100 million, with at least half of their total investment into back-end infrastructure, such as warehousing and cold storage facilities.

 

The decision to allow retail FDI in multi-brand stores has, and continues to, face stiff opposition, with protests in cities and towns across India when the announcement was made, and tough political stances, such as the declaration by the Bharatiya Janata Party that it would scrap the proposals if voted into power.

 

However, in an address to the nation, Indian Prime Minister Manmohan Singh said: ‘Organized, modern retailing is already present in our country and is growing. All our major cities have large retail chains. Our national capital, Delhi, has many new shopping centers. But it has also seen a three-fold increase in small shops in recent years.

 

‘In a growing economy, there is enough space for big and small to grow. The fear that small retailers will be wiped out is completely baseless.

 

‘We should also remember that the opening of organized retail to foreign investment will benefit our farmers. According to the regulations we have introduced, those who bring FDI have to invest 50 percent of their money in building new warehouses, cold storage and modern transport systems.

‘This will help to ensure that a third of our fruits and vegetables, which at present are wasted because of storage and transit losses, actually reach the consumer. Wastage will go down; prices paid to farmers will go up; and prices paid by consumers will go down.

 

‘The growth of organized retail will also create millions of good quality new jobs.

 

‘We recognize that some political parties are opposed to this step. That is why state governments have been allowed to decide whether foreign investment in retail can come into their state. But one state should not stop another state from seeking a better life for its farmers, for its youth and for its consumers.

 

‘In 1991, when we opened India to foreign investment in manufacturing, many were worried. But today, Indian companies are competing effectively both at home and abroad, and they are investing around the world. More importantly, foreign companies are creating jobs for our youth – in information technology, in steel and in the auto industry. I am sure this will happen in retail trade as well.’

 

Global retail giant Walmart, one of the foreign firms heavily linked with any change in retail legislation in emerging markets, said: ‘We believe that allowing 51 percent foreign direct investment in multi-brand retail is an important first step for the Government of India to further open this sector.

 

‘We are grateful that the Government has realized and appreciated the value that we will bring to strengthen the Indian economy. This policy change will allow us to connect directly with the consumer and save them money. By being "stores of the community," we will also help them live better. We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation.

 

‘Through these, and several other initiatives, we hope to make a positive impact on the lives of the people of India.’

 

It is anticipated that it will take up to two years for international firms to open up operations in India, with Walmart telling the Wall Street Journal it was hoping to have a store open within 12-18 months.

 

Industry commentator, and Package Print Worldwide managing editor, Andy Thomas, said: ‘It’s generally agreed that allowing FDI by global retailers in India will give a significant boost to domestic growth, encourage the development of modern nationwide logistics chains and greatly boost the demand for value added labels and packaging.

 

‘Up to now, foreign retailers have only been able to enter India with majority owned businesses if they are selling their own-brand products – multiple brand vendors always needed to be in a minority partnership with an Indian partner.

 

‘Now that has changed, with the passing by the Indian government of a retail industry FDI act allowing foreign retailers to own 51 percent of their Indian enterprises, which will most likely come from acquisition in the early stages.

 

‘The government tried to introduce FDI earlier this year, but was forced to retreat in the face of raucous opposition protests and coordinated street demonstrations. Now the cabinet has summoned the courage to try again, and this time it looks like it will stick.

 

‘But to get it through parliament a number of loopholes have been inserted which could fatally weaken the new law.

 

‘Most importantly, the government has given each state an effective veto over FDI in its own jurisdiction. So far just a handful of states have announced they will sign up, including Metropolitan Delhi.

 

‘Throughout India, however, opposition is growing, most ominously in key states such as West Bengal and Punjab, which have announced implacable opposition to retail FDI.

 

‘Making this situation worse, another clause in the bill means foreign-owned multi-brand retailers can only set up in cities with one million or more inhabitants. There are 53 such cities in India, but only 16 in states which have signed up to FDI.

 

‘So we may yet see the first Walmart, Carrefours or Tesco in India, bringing with them the complex supply chains of the major global brands.

 

‘But how keen will they be to come to India in the face of mass popular hostility, whipped up by India’s famously fractious opposition? On the other hand, can they afford not to be selling to one of the world’s youngest, biggest and fastest growing populations of middle class shoppers?’

 

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