Retailer shares up after FDI move, but concerns emerge

MUMBAI Fri Nov 25, 2011 12:05pm IST

Customers shop at a Best Price Modern Wholesale store, a joint venture of Wal-Mart Stores Inc and Bharti Enterprises, at Zirakpur in  Punjab November 24, 2011. REUTERS/Ajay Verma

Customers shop at a Best Price Modern Wholesale store, a joint venture of Wal-Mart Stores Inc and Bharti Enterprises, at Zirakpur in Punjab November 24, 2011.

Credit: Reuters/Ajay Verma

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MUMBAI (Reuters) - Shares in Indian retailers jumped on Friday after the government opened up the $450 billion supermarket sector to global giants, but concerns emerged that caveats aimed at appeasing political opposition could hinder an expected flurry of investments.

The government on Thursday approved 51 percent foreign direct investment in the supermarket sector, paving the entry of firms such as Wal-Mart, Tesco and Carrefour into one of the world's largest untapped markets.

Indian retailers are expected to tie up deals with these companies and shares in Pantaloon Retail (India) jumped as much as 18.2 percent, Shopper's Stop rallied 15 percent and Trent, part of the salt-to-steel Tata Group conglomerate, rose 17.2 percent.

In comparison, the BSE Sensex was down 0.29 percent at 11 a.m. (0530 GMT).

But the new policy, seen as one of the most important government economic reforms in years, may commit supermarkets to strict local sourcing requirements and minimum investment levels aimed at protecting jobs.

(Also read: Time catches up with India's traditional bazaars, click here)

The requirements are due to fears of potential job losses among small traders that could heighten popular anger at Congress party ahead of key state polls next year that will set the stage for the 2014 general election.

Local media reported on Friday that individual states would have the power to veto foreign retailers - a caveat that could make it impossible for these companies to work in some of India's biggest states run by the opposition.

That could, for example, exclude investor-favourite states like Gujarat, which is run by Bharatiya Janata Party.

The government was expected to release policy details later on Friday.

"Government efforts to overcome the opposition through tough stipulations ... which hark back to the days of the licence raj - are also equally dangerous," The Times of India said in an editorial on Friday.

"FDI ventures would be successful only if retailers are allowed to introduce practices benchmarked to the best in the world. Restrictive clauses which tie their hands are best avoided."

This would not be the first time a big-ticket reform has sunk due to devilish details. In 2008, the government passed the U.S. civilian nuclear deal aimed at opening up India's nuclear power market to foreign players, hailed as the cornerstone of India's warming ties with the United States.

But investments have since languished due to stringent accident liability clauses that U.S. companies say make it too risky to invest.

Political opposition could also be a deal breaker. India's biggest listed company, Reliance Industries, was forced to backtrack on plans in 2007 to open Western-style supermarkets in Uttar Pradesh after huge protests from small traders and political parties.

Still, there was optimism that momentum was on the reform side.

Indian retail chains have been allowed to operate for years, but they have struggled to expand due to funding difficulties, a lack of expertise and poor roads and cold storage facilities.

(Reporting by Henry Foy; Writing by Alistair Scrutton; Editing by John Chalmers)

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