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BW Businessworld

Global Players Read Fine Print On Retail Invitation

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Global supermarket chains hailed India's move to open up its $450 billion retail market, but cautioned that the policy's fine print may keep a lid on investment in the short term.

The government late on Thursday approved 51 per cent 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 a fall on the wider stock market -- as they should tie up deals with these 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.

The move, opposed by millions of small shop owners who fear for their livelihoods, prompted an uproar in India's parliament which was forced to close until Monday.

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.

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, Industry Secretary P.K. Chaudhary told Reuters.

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

Trade Minister Anand 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.

The head of Walmart'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 Walmart.

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 now, and predicted new arrivals would have a smoother ride.

"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.

Thomas Varghese, CEO of another Indian retailer, 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.


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