India’s Retail Revolution: On Layaway?

Via The Financial Times, a more sobering look at India’s recent retail laws:

India’s rush of reforms last week drew praise for a government normally resistant to anything that might compromise its electoral prospects.

But, as days have gone by, the limitations of the government’s actions have become as apparent as the potential: India won’t be climbing out of its fiscal ditch in a hurry, Nor will its sluggish economy be suddenly hit the accelerator.

There’s the diesel subsidy cut which, while long-desired, will only cut 0.1 per cent of GDP from the fiscal deficit (5.8 per cent of GDP last year); the divestment goals that had already been announced; and the opening up of local airlines to investment by foreign carriers, which won’t be rushing in while the government continues to prop up ailing Air India.

And then there is FDI in multi-brand retail. The head of the Confederation of Indian Industry in a Monday op-ed, called the reform “a game-changer”, citing its benefits to farmers and SMEs, lower food prices, improved infrastructure and supply chain, and job creation.

That all may well be true in the long run, but one of the reform’s provisions – that companies must secure entry state-by-state, rather than getting blanket licences to operate across India – will need to be clarified if the reform is to have any effect at all.

Arvind Singhal, CEO of Technopak, India’s leading retail consultancy, said the state-specific approach could create chaos should a state election change the balance of power in the local administration.

“It’s really confusing because …each state has local elections and if there is a state that has said yes and tomorrow in the election if the [opposition Bhartiya Janata Party] comes in, then what happens to the proposal?” he said.

The government has yet to send out its official notice on this and other important details – such as whether an Indian company that already operates in India, could continue to do business in hostile states, if it sold control to a foreign investor.

The state-level opposition is headed by West Bengal, and its chief minister Mamata Banerjee who, is actually a member of the ruling collation. Her supporters have already taken to the streets to protest: it was she who effectively torpedoed the government’s attempt to pass FDI in multi-brand retail late last year. Thursday will see a nationwide strike of unorganized retailers, more than 50m by some forecasts.

West Bengal is joined by Bihar, Karnataka (home to tech hub Bangalore), Kerala, Madhya Pradesh, Tripura and Orissa. The chief minister of India’s largest state, Uttar Pradesh, has also come out against the reform.

These are mostly opposition Bharitya Janata Party-ruled states. The party on Tuesday said that the state-by-state model would violate certain bilateral investment treaties the government had previously signed. But Delhi released a statement later on Tuesday dismissing the claims:

Since FDI in multi-brand retail trading was not allowed when these agreements were negotiated, none of these agreements is affected by the recently approved policy. Moreover, state and local regulations are not a part of the commitments.

The government can count on support from Congress Party-led states: it has said it has support from Delhi, Maharashtra, Assam, Andhra Pradesh, Rajasthan, Haryana, Uttarakhand, Jammu and Kashmir and some union territories. Few, with the exception of Maharashtra, have come out on record as supporting the politically-volatile reform.

The assent of Congress-controlled Maharashtra, home to commercial centre Mumbai, and Delhi may be enough as a first step for retailers though, said Pinakiranjan Mishra, head of retail at Ernst&Young. After all, these are the country’s most lucrative markets – and poorer states like West Bengal or Bihar were never going to be great opportunities for modern retail.

“It could have been much bigger, but … there are still a lot of states – the actual states where people will go first, [including] Maharashtra and Delhi – [there is still a] lot of room for set up,” he said. “If companies come to India, they aren’t going to set up 10 stores in one go, so I think if they implement it properly in those places, then there is great opportunity [to grow from there as states begin to see the benefits enjoyed by their neighbours].”

Indeed, retail analysts have long argued that there is no such thing as a pan-India strategy because India is made up of very different regions, segmented by culture, language and customs.

But railways cross borders, and part of the government’s stipulation for foreign companies is that within the first three years, half of their investment goes toward infrastructure – which is woefully decrepit and extremely underdeveloped across India. Let’s say two states have accepted FDI in retail, along with the incumbent infrastructural investment, but the one between has not – what if the infra in the middle state cannot accommodate the logistical needs of the other two?

It’s yet another complication, one many hope the government fixes – as it did by relaxing a rule requiring single-brand retailers such as Ikea to buy 30 per cent of their supplies from small enterprises.

“It is very frustrating that after having waited 10 months after that debacle where they had to withdraw [the FDI in multi-brand retail proposal in 2011], for them not to understand what is practical and what is not, and what will be successful,” said Singhal.

“There are so many complications in the policy … if you don’t want to open it, don’t open it, but then don’t make a big noise about how you’ve done it and then put in restrictions that make it possible but business-wise completely impractical.”

This entry was posted on Tuesday, September 18th, 2012 at 6:11 pm and is filed under India.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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