The Indian government has performed a dramatic U-turn, first announcing it would permit foreign multi-brand retailers to set up shop in the country and then reversing the decision in the face of heavy opposition just days later.
The prime minister, Manmohan Singh, said plans to raise foreign investment caps in the retail sector had been put on hold and not abandoned altogether. In an interview in his office in Parliament House, Singh told Bloomberg: “There may be zigzags along the way, but the path is the one I set.”
On 7 December, the finance minister, Pranab Mukherjee, said the government would make a decision about retail liberalization once a consensus had been reached “after consultations with all stakeholders”.
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The highly charged issue of foreign direct investment (FDI) in multi-brand retail severely disrupted the functioning of the country’s parliament after the government announced its plans to liberalize the sector in late November. The opposition Bharatiya Janata Party, which vociferously opposes retail liberalization, blocked various parliamentary proceedings in protest at the move.
The government initially promised to relax foreign investment caps in the retail sector to allow foreign companies to invest up to 51% in multi-brand retail. But for supermarket chains like Tesco and Walmart, which have been vying for a place in the Indian retail market for years, the celebration was short-lived.
“The decision to defer FDI is a missed opportunity for Indian producers, farmers and consumers,” Greg Sage, a communications director at Tesco, told India Business Law Journal. “We will continue with our franchise arrangement with Tata’s Star Bazaar stores.”
Walmart entered the Indian market four years ago through the wholesale cash-and-carry route, where 100% foreign investment is permitted. It tied up with Bharti to establish a wholesale business that supplies produce exclusively to Bharti’s consumer retail division. Bharti Walmart had 12 wholesale cash-and-carry stores in India at the end of November.
Speaking to India Business Law Journal, Arti Singh, Walmart’s senior vice-president of corporate affairs for India, said: “We respect the government’s decision and look forward to a consensus being reached on FDI in multi-brand retail.”
India’s retail industry is worth approximately US$435 billion. According to projections in a report by PricewaterhouseCoopers (Strong and Steady: 2011 Outlook for the Retail and Consumer Products Sector in Asia), the sector could be worth US$900 billion by 2014.
Proponents of retail liberalization argue that greater foreign participation would give Indian consumers a wider variety of products at competitive rates, and would create job opportunities for small shop owners.
“A shopkeeper managing a tuck shop would probably find that they could apply for a job at Walmart that is more secure,” Shardul Thacker, a partner at Mulla & Mulla & Craigie Blunt & Caroe, told India Business Law Journal. “There would be a lot of activity outside the cities as well, with supermarket express stores popping up along the motorways and petrol pumps in India.”
However, opposition to any liberalization in the sector is strong and broad-based. Social activist Dharmendra Kumar, a director of India FDI Watch, said he welcomed the suspension of the cabinet’s decision to increase foreign participation in multi-brand retail.
“The decision underlined the democratic deficit in the trade policy-making process of the Indian government,” Kumar told India Business Law Journal. “It is high time that parliament should be given a more decisive role in trade policy-making.”
India FDI Watch campaigns to prevent FDI in India’s retail sector. The group is determined to keep retailers such as Walmart, Tesco and Carrefour out of the country unless they are able to “make satisfactory guarantees that would protect communities; ensure the stability of existing small businesses and traders; guarantee fair wages and working conditions for their own employees and source employees along with union protection and agreements; and ensure that a significant percentage of sourcing derives from the Indian market”.
Kumar conceded that FDI in multi-brand retail will eventually become a reality. But he said that it is vital for the government to lay down sufficient safeguards to protect the weaker links of the supply chain. Arguing that a “self-certifying regulatory framework is not sufficient,” Kumar said that “an independent retail regulatory authority needs to be set up to monitor supply contracts and competition to have any chance of realizing the benefits, if any.”
A separate reform to extend the foreign investment cap in single-brand retail from 51% to 100% is still being considered. This would allow foreign single-brand retailers, such as Ikea, to open wholly owned stores in India. (See our correspondents’ views pages 75 and 82.)
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