Is India Ready to Embrace Multi-brand Retail Giants?

Extensive street demonstrations and uproar in parliament against proposed reforms in retail sector in India has exposed the ability of congress-led ruling coalition – United Progressive Alliance (UPA) – to push forward any comprehensive reforms to liberalize investment regime and put the economy back on track.

Demonstrators from the Samajwadi Party shout slogans after they stopped a passenger train during a protest against price hikes in fuel and FDI in retail, near Allahabad railway station

In the back drop of slowing economic growth, spiraling food prices, mega corruption scams, ethnic strife in the North East and massive criticism on Dr. Manmohan Singh – the Indian Prime Minister – for being too timid to implement reforms, the government of Dr. Singh announced much-needed reforms in Mid-September aiming at withdrawing energy subsidies and opening retail sector, among others. Though the reforms come with strings attached, like investing 50 percent of capital in back-end operations and sourcing 30 percent of the products in India,  it is still not enough to assuage opposition, trade unions and coalition partners. This video explains the anger.

Mindful of the demonstrations and weaknesses of his coalition government, Dr. Singh addressed the nation to sell his reforms. “In a growing economy, there is space for big and small to grow. The fear that small retailers will be wiped out is completely baseless. The world is not kind to those who do not tackle their own problems,” he said.

India is one of the post-eighties globalizer that relied on central planning and inward looking approach for economic development for first four decades of its independence. Abysmal growth rate during most of the eighties compelled India to liberalize its economy and embrace international competition.  Dr. Singh was at the forefront of economic liberalization during the nineties. The reforms of nineties worked reasonably well for India especially in the services sector which now makes up 59 percent of GDP. Openness in the agriculture sector remained off-limits mainly due to India’s lopsided reliance on the sector for provision of livelihood to poor living in rural areas. Despite secular growth in services sector, agriculture still makes up about 20 percent of GDP and employs roughly half of the labor force. This partially explains the reason behind the demonstrations.

India-with a population of 1.2 billion- has fifth largest retail sector in the world. The retail sector in India makes up 14-15 percent of GDP and has a market of $ 450 billion with a huge potential to reach $ 800 billion by 2015. The composition of the retail sector is heavily tilted in favor of traditional mom-and-pop shops that account for around 90 percent of the sector. Though India allowed FDI in cash and carry (wholesale) in 2006, the 100 percent equity participation in single-brand (like Apple, Adidas) did not come until January 2012. Before the current reforms, the multi-brand (like Wal-Mart, Carrefour) was restricted to 49 percent which has been increased to 51 percent of equity participation under the new reforms. This infuriates the opposition political parties, trade unions and some of the coalition partners, spurring protests as well as debate on the advantages and disadvantages of openness in the retail sector.

Bharatiya Janata Party (BJP), the main opposition party, is up for seizing this opportunity to further push the fragile coalition into a closed corner where it can enforce early elections, otherwise due in 2014. L K Advani, leader of BJP, claims of having documentary proof of Dr. Singh being against FDI when he was in the opposition. However, the main threat to congress-led coalition comes from inside. Mamata Banerji, the Chief Minister of West Bengal, has pulled out of the coalition and is leading demonstrations from Kolkata to New Delhi. If National Democratic Alliance (NDA)-led by BJP- manages one more defection from the ruling coalition, Dr. Singh’s government would be on a ventilator.

The Prime Minister and his cabinet make every effort in selling the benefits of openness in retail sector. FDI would reduce food prices, improve weak infrastructure, create jobs, cut waste and narrow current account deficit, they argue.

NDTV, a renowned commercial broadcasting network, comes to government’s rescue, “FDI in retail sector will create 10 million jobs in 10 years – both direct and indirect jobs in sales, customer services, back-end logistics and IT.”

However, farmers, trade unions and opposition parties do not buy this argument and maintain that it will create monopolies and throw millions of Indians out of job.

Wal-Mart, world’s largest retailer, is already partnering with Bharti Enterprises in the wholesale market and is very keen to enter the retail market too. Carrefour, Tesco and Ikea also view these reforms optimistically and are gearing up to move into India to benefit from the potential that Indian retail market offers. However, there is a caution for these retailers: how significant these reforms are and will they be implemented in letter and spirit?

The current proposal allows States to pull out of FDI reforms in retail sector if they wish so, and also makes it obligatory on retailers to open up their outlets only in cities with at least 1 million populations.

“Only 10 of India’s 35 states and territories which are controlled by ruling congress party are likely to welcome foreign retailers initially, says Erika Kinets of Huffington Post. She also expresses skepticism about India’s rules and regulations, which according to her, are more restrictive than those of China, Russia, Thailand, Brazil and Indonesia.

Milan Vaishnav, Associate South Asia Program at Carnegie Endowment for International Peace, describes these reforms as more of a symbolism than substance, a first step in right direction but by no means a panacea for India’s ongoing economic troubles.

The current political structure of India is fragmented in such a manner that both major parties –Congress and BJP- rely on regional parties and pressure groups to form government at the center, making  them  hostage to political blackmailing from different stakeholders at state level. Unfortunately, India struggles to find a popular, charismatic leadership that has the drive, appeal and stamina to forward bold reforms to put India back on growth trajectory.

The Economist Magazine has aptly summed up leadership issue in India: 65 years ago, its leaders had a vision for country- liberal democracy with a reverence for poverty- now it needs its own version of America’s dream and commit itself not just to the political and civic freedom but also to the economic liberalism.

For reforms to go forward India needs a consensus among political parties so that the reforms do not roll back when current government leaves office. Such consensus, though difficult to reach, will have huge bearing on investment decisions of retail giants.

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