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BW Businessworld

Can Retail Reforms Be Saved?

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Could the government have saved the situation in retail reforms if it hadn't dropped a key clause to protect the interest of small kirana shops in its policy despite flexibility shown by the global giants like Wal-Mart and Carrefour on the original proposal?

Apparently, in the discussion paper of the Department of Industrial Policy and Promotion (DIPP), it was suggested that foreign retailers like Wal-Mart and Carrefour should integrate India's small retailers in their supply chain, reports a news agency. It was contemplated that some portion of the big retailers' sales must be through their supplies to the kirana shops.

While no percentage was suggested in the draft paper, an official who was associated with the policy formulation had suggested that 30 per cent of foreign retailers' sales should be to the kirana stores.

"Had it been done, the opposition from the traders would not have been that strong," he said.

The bad handling of the retail FDI issue by the government is now expected to put a pause in the much-trumpeted retail industry reforms. Shares in retail firms dipped and the business community rounded on the government after the ruling Congress party put on hold plans to open up the country's $450 billion retail industry to foreign supermarkets.

Indian Finance Minister Pranab Mukherjee on Monday told opposition leaders, including Sushma Swaraj and Sitaram Yechury, that the decision on allowing Foreign Direct Investment (FDI) in retail was being put on hold and a final decision will be taken only after consulting all opposition parties.

Wal-Mart, Carrefour Flexible
The FDI policy, which permitted 51 per cent foreign investment in multi-brand retail, dropped the original proposal by DIPP to integrate small retailers in their supply chain.

"Given the close relationship of wholesale retailing to front-end multi-brand, we recommend that investments in front-end retailing stores be accompanied by investments in wholesale," Wal-Mart said in a communication to the DIPP.

Wal-Mart also suggested that "for every square foot of multi-brand retail, retailers should also develop an additional 1/3 square foot in cash-and-carry stores".

Similarly, French retail giant Carrefour had said, "we would be open to the concept of setting up distribution centers or cash and carry stores in the locations or regions of our future retail operations."

"The government is willing to keep the decision in suspension. It will take a final decision only after consultations with all opposition parties and the stakeholders," sources said after Mukherjee spoke to Swaraj, Leader of the Opposition in Lok Sabha(Lower house of Indian Parliament) and Communist Party of India(M) MP Yechury on Monday morning.

Govt On Back-Foot
Mukherjee had last week told an all-party meeting, which had asked the government to reverse the FDI decision, that he would get back to them after he consulted the Prime Minister and the Union Cabinet which had taken the decision.

Yechury is understood to have told Mukherjee monday that it would be in fitness of things that all political parties are informed about keeping the decision to allow 51 per cent FDI in retail in abeyance.

The opposition, however, is still firm on having a discussion in Parliament on major issues like price rise and blackmoney under rules which entail voting, the sources said.

Shares in retailers who stand to benefit from rules allowing global giants such as Wal-Mart Stores Inc to take a 51 per cent stake in supermarket operations fell as much as 10 per cent in early Monday trading.

Any postponement or watering down of the policy, which some say will destroy the livelihood of millions of small shop owners, would be a huge embarrassment for the government, which has failed to pass any big-ticket economic reforms as it struggles with allegations of widespread graft.

Mamata Banerjee, Congress party's biggest ally and an opponent of the policy, said on Saturday the government had told her the plans would be put on hold until a consensus had been reached.

"Mr Singh has scored an own-goal by not even seeking out the support of his own party, never mind allies within the UPA (the government coalition), before his cabinet took the decision," the Hindustan Times wrote in an editorial on Monday.

"That the (coalition) has been sailing in choppy waters without much of a compass to guide its journey becomes apparent."

The government was likely to release an official statement regarding the issue on Monday.

The main opposition, the Hindu nationalist Bharatiya Janata Party, has led protests in parliament against the measure, which was passed by the country's cabinet two weeks ago. Both chambers have been paralysed by vociferous dissent.

Opposition to the measure was "to the detriment of the vast majority," wrote Ashok Ganguly, former chairman of Hindustan Unilever and Deepak Parekh, chairman of Housing Development Finance Corp, in an open letter described as "a call to the saner sections of Corporate India to come out and strongly support progressive measures."

Stocks Slide
Shares in Pantaloon, whose Big Bazaar supermarket chain is seen by sector analysts as the number one tie-up target for a foreign supermarket, fell as much as 11 per cent on Monday -- giving up much of the gains made after the reforms were announced on November 24.

Shares in Shopper's Stop dropped over 9 per cent, while Trent, the retail arm of the Tata Group conglomerate which already has an association with UK giant Tesco, slid as much as 4 per cent. The main 30-share BSE index was down 0.75 per cent.

Amar Ambani, Head of Research, India Infoline said retail stocks were affected by reports that the Centre has put the proposed opening of retail to FDI in cold storage. The parliament, which has been paralyzed during the ongoing winter session, will resume on Wednesday and is likely to see a stormy session.
 
Globally, though US seems to be okay. The focus this week will be on Europe as lots of important developments are lined up. The biggest of them all will be the EU Summit on Dec. 9," says Amar Ambani, Head of Research, IIFL.

Manmohan Singh and his senior cabinet colleagues last week rejected calls to roll back the policy, opposition to which has drawn on deep-seated nationalism in the BJP, who decry the plans as selling out to western interests.

(With Agencies)