Global players wary of fine print on India retail invite

NEW DELHI Fri Nov 25, 2011 7:19pm IST

A man takes out a packet of yogurt from a refrigerator at a food store in Noida, November 24, 2011. REUTERS/Parivartan Sharma

A man takes out a packet of yogurt from a refrigerator at a food store in Noida, November 24, 2011.

Credit: Reuters/Parivartan Sharma

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NEW DELHI (Reuters) - Global supermarket chains welcomed a long-awaited invitation from India to invest in the country's $450 billion retail market, but they fear the small print may keep a lid on investment in the short term.

The government on Thursday approved 51 percent foreign direct investment in supermarkets, paving the way for firms such as Wal-Mart Stores Inc, Tesco and Carrefour to enter one of the world's largest untapped markets.

Shares in Indian retailers jumped -- bucking the weaker stock market trend -- in anticipation of interest from those big foreign retailers.

The move may breathe new life into the government of Prime Minister Manmohan Singh, who ushered in free market reforms 20 years ago but has been bogged down by corruption scandals and was starting to be seen as a lame duck.

As well as appealing to India's burgeoning urban middle class the reform will draw in much-needed new investment to a sputtering economy. Policymakers say spending on cold-storage and warehousing will ease supply-side pressures that have driven inflation close to a double-digit clip.

"It's important not only for raising overall growth, but also for containing inflation and improving the quality of life for over 50 percent of the population," said RBI Governor Duvvuri Subbarao.

Investment could exceed $5 billion in the next 5-7 years as hundreds of hypermarkets are opened, said Vijay Karwal, head of retail at the Royal Bank of Scotland.

"There may be a degree of 'catch up' with foreign flows into India retail possibly starting to match, if not exceed, those into China as development picks up pace," he said.

The move carries risk for Prime Minister Singh, whose party must contest five state elections next year. It is opposed by millions of small shop owners who fear for their livelihoods, and prompted an uproar in parliament, which was forced to close until Monday.

Some politicians threatened extreme action to prevent supermarkets opening.

" If Wal-Mart tries to open its mall anywhere, I will burn it myself," said Uma Bharti, a former state chief minister from the Bharatiya Janata Party (BJP), local media reported.

An India-wide group representing small traders said it was planning protests for next week.

"They should have worked on some kind of protectionist mechanism for smaller traders," said Praveen Khandelwa, the head of the confederation of all India traders.

RIDERS

To appease its opponents, the government insisted foreign retailers source almost a third of their produce from small industries, invest a minimum of $100 million in India and spend half of that on "back end" infrastructure.

An official at one major international retailer said the company was concerned about the numbers the government had mentioned.

"Some of the conditions look quite stringent. The investment in particular -- it's all quite big money. We'd need to know the details, and how that would be accounted for," the official said on condition of anonymity.

Foreign stores will only be permitted in cities of more than 1 million people, and individual states will decide whether to allow the global giants on to their patch.

That could, for example, exclude investor-favourite states like Gujarat, which is run by the BJP that opposes new foreign supermarkets.

Sharma said new investment would create 10 million jobs in the next three years and would not affect small shops, a claim scorned by parties on both the left and right who predict that millions of jobs will be lost.

"We are sitting on a time bomb in terms of employment," said economist Jayati Ghosh. She said India should upgrade public and cooperative supply infrastructure, not rely on corporations.

The head of Wal-Mart's local cash-and-carry joint venture praised the move, but also struck a note of caution.

"We will need to study the conditions and the finer details of the new policy and the impact that it will have on our ability to do business in India," said Raj Jain, CEO of Bharti Wal-Mart.

TOUGH GOING

Domestic retail chains have operated in India for years but have struggled to expand due to funding difficulties, a lack of expertise and poor roads and cold storage facilities.

If political opposition mounts, foreign firms could find the going tough.

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.

Bijou Kurien, a senior executive at Reliance Retail, said the mood had changed.

"The regulatory and non-regulatory pressures in India are the way of life," he said. "So any person running a business in India has to be able to figure out how to steer their way through all the obstacles that can be in their path."

He said the back-end and sourcing rules may stop big-box electronics stores from coming into India for now, but said the rules would likely soften in the medium term.

The conditions could also deter smaller international retail chains, said Himanshu Pal, global data manager at consultants Kantar Retail. However he said India should appeal to budget chains.

"The Indian shopper is at the moment starved of a discounted, value product offer. A Lidl or an Aldi could be very successful in India."

Thomas Varghese, CEO of Aditya Birla, said the power given to states could be a short-term hurdle, but he predicted most would say yes to supermarkets.

"It most definitely will have an impact and reduce the number of places where foreign retailers can set up shop, but it will still not reduce the interest because 51 cities have a million-plus population," he said.

In the past, big-ticket reforms have been held back by the devil in the detail.

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.

(Additional reporting by Henry Foy and Nandita Bose in Mumbai and Mark Potter in London; Writing by Frank Jack Daniel; Editing by John Chalmers and Nick Macfie)

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Comments (1)
Subrabhama wrote:
Allowing FDI in retail in the hope that foreign capital will flow is and bring about manna on India is unrealistic. Wal-Mart hit headlines for some years and this was a historical accident. China had become the manufacturing hub for thousands of consumer and electronic items and big retailers, in particular Wal-Mart, could outsource from China. Those conditions have since changed. Wal-Martodel did not work in Germany, Japan or South Korea. Part of the reason was cultural. It could apply to India too, but needs to be seen.

Big retailers like Wal-Mart look for captive arrangements for purchase of items and to import from their own global sources. They would expect full freedom. The caveats attached to FDI in retail will deny this freedom and inhibit their operations greatly. It will not conform to their global corporate strategies or management of supply chains.

In China, Wal-Mart was a great success for some years due to the phenomenal infrastructure which facilitated build up of supply chains. In India, the conditions are abysmal and if the GOI believes that the Big ticket retailer will build the infrastructure, including cold storage, etc out of his funds, it is moonshine. It will eat away the margin attached to sales. It is forgotten that in China they built a special port for Wal-Mart to facilitate exports to the US? Is India ready for it and at whose cost?

The most glaring feature of Wal-Mart operations in China was that the company pit one local supplier against another and brought down the prices. There are horror stories written by US business papers about Wal-Mart’s sales meetings and the malpractices this led to including suicides. When dealing with the toy industry it came out out in the open with leaky lead paints! The “ever low prices” policy of Wal-Mart came at a great human cost at the Chinese end and it was not all hunky dory all the way. Indian policymakers seem to be unaware of these ground realities in China and are panic driven. Recently, Wal-Mart has been directed to close down several (43 or so) shops in western province for sale of adulterated pork products. Is India ready for similar iron-handed regulation in dealing with Wal-Mart? It is doubtful. Though several cnoditions are attached to FDI, Indian regulators will not be able to enforce any of them. We had seen this in dealing with Coca-Cola and Pepsi Cola.

If FDI has slowe3d down in recent years there are important global and India-centric reasons. Gl;obally capital has become short and the banking crisis has dried up flows. Assets are being sold in emerging economies and being taken to headquarters to fill gaps in banks’ capital, etc. This trend cannot be revered, at least in the short term, by allowing FDI in retail or any other sector. The strict environmental restrictions attached to FDI in extractive sector has been another factor. Is India proposing to remove them? These are not reveresed by opening the retail sector. As the saying goes, it is like applying rose water to cure cancer. Dilution of FDI at this stage is an admission of weakness and not a sign of strength in a growing economy. India should watch how China is responding to western pressures, US in particular.

Nov 26, 2011 3:34pm IST  --  Report as abuse
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