THE BLOG

India's USD 450 Billion Invitation to the World Runs Into Rough Weather at Home

India's government battled pressure from a united opposition on its November 25 decision to open up the country's retail sector, worth an estimated $450 billion, to international brands like Tesco and Wal-Mart.

The cabinet in New Delhi took the decision to allow 51% foreign investment in multi-brand retail stores and up to 100% in single brand retailers in cities with a population of more than one million. The decision stipulates that foreign firms, which at the moment are able to partner with Indian businesses as minority stakeholders to operate wholesale operations, would have to make a minimum investment of $100 million, half of which would have to go in transport, storage and other associated infrastructure in rural to semi-urban areas.

Explaining the rationale behind the government decision, D Subbarao, the Governor of Reserve Bank of India (RBI), India's Central Bank, said the government's move to open up the retail sector is aimed a boosting growth and control inflation. India is presently suffering from double-digit inflation and a slowing down of economy that is further hurt by the Indian currency hitting a historical low against the dollar in November.

Talking at a seminar in Chandigarh, a city north of New Delhi, Subbarao said "It's commendable as the government has taken the initiative. Let's hope that it will improve the logistics chain and supply chain management in agriculture."

"Raising agricultural production and productivity is vital towards containing price pressures, raising rural incomes and making growth more inclusive," he added.

The opening up of India's retail market has been welcomed by global brands like Carrefour, which has long been advocating the move. In a press communiqué, Carrefour officials said that the company could help modernize infrastructure in the country where a third of produce goes waste every year due to poor road and storage - especially refrigeration - infrastructure.
Similarly, a spokesman for Tesco told The Independent, a UK daily, "Allowing foreign direct investment in retail would be good news for Indian consumers and businesses and we await further details on any conditions."

The excitement amid global retailers about the cabinet decision can be understood by the fact that A T Kearney, a US-based global management-consulting firm, in its Global Retail Development Index (GRDI) report 2011, ranked India as the fourth most attractive nation for retail investment among 30 emerging markets.

Also, the Business Monitor International (BMI) India Retail Report for the fourth-quarter of 2011 forecasts that the total retail sales will grow from $ 411.28 billion in 2011 to $ 804.06 billion by 2015. While Booz and Co (India) Pvt. Ltd., a global management and strategy consulting firm, said in its annual report that Indian retail market entails only 6 per cent of itself as organised retail segment as of 2010 - thereby offering huge potential to be explored by domestic and international players.

Rajan Bharti Mittal, director of Bharti Enterprises, which has 13 exclusive joint ventures with US retail giant Wal-Mart acknowledged the above assessment by dubbing the cabinet decision as a "major landmark in India's economic reforms process".

But not everyone agrees with him in India on the issue.

Expressing her surprise on the sudden decision by the government on an issue that has been under active deliberation amongst all political parties since many years, Sushma Swaraj, leader of the opposition in Lok Sabha, the lower house, tweeted: "Parliament is in session and the Government announced a decision of such far reaching consequences outside the Parliament."

Her surprise is rooted in the fact that the deliberations on foreign investment in retail dates back to 1993, when the then finance minister had introduced a law that permitted foreign investment in retail. Since then, the policy has seen many ups and downs, as per the nature of the political landscape of the nation - even as foreign multinationals lobbied hard to sell directly in a market that is seen as a replacement for the saturated markets of the west.

It is that active lobbying by global giants that instills further fear into the minds of local retailers. The biggest fear of the smaller retailers is that over a period of time, big retailers would start displacing the entire supply chains of the products, and make them redundant.

The fear of losing out on business and livelihoods due to the present cabinet decision has united small shopkeepers and trade unions against the decision across India - thereby putting pressure on influential state leaders and lawmakers both from opposition parties and from within the ruling coalition to safeguard their electoral constituency by opposing the cabinet decision.

The government tried to assuage the fears by saying that small and medium domestic retailers would not be affected, as the decision would impact only 53 cities of over one million population, out of the 8000 towns and cities of India. Making a statement in the parliament on November 25, commerce minister Anand Sharma said that the cabinet decision would in fact create 10 million jobs over three years.

But his assurance failed to bear fruit, as opposition parliamentarians in both the upper and lower house expressed noisy anger and tore up copies of his statement on their way to securing adjournment of proceedings.

The all-party meeting on November 29, chaired by Finance Minister Pranab Mukherjee to address the logjam in parliament, ended without a deal being reached, and parliament remained paralysed by noisy protests against the reforms.

Amid the noise, Prime Minister Manmohan Singh on November 30 rejected calls to reverse the cabinet decision, saying the entry of foreign supermarket giants would help modernise the $450 billion sector and fight stubbornly high inflation.

In his first public statement on the controversy, Singh said at a meeting of the ruling Congress party, "The decision on allowing FDI in retail was not taken in any hurry, but well considered," adding that investment rules would protect small businesses.

For the moment, it is not cutting much ice with the opposition. "The government has introduced the policy of foreign investment in retail under intense lobbying of companies in the US and other western nations. We are totally against it," Murli Manohar Joshi, a very senior leader of the principal opposition party Bharatiya Janata Party (BJP) told reporters.