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  1. Analysis
July 7, 2009

FDI off India’s menu but rural push will help retailers

The world's top food retailers may not have got the news they were looking for when India's new government published its first annual budget yesterday (6 July). Despite apparent support in some political circles for a loosening of the laws restricting foreign investment in Indian retail, the budget made no mention of any reform. However, as Dean Best reports, the likes of Wal-Mart, Tesco and Metro Group should still be cheered by India's plans for modernisation.

By Dean Best

The world’s top food retailers may not have got the news they were looking for when India’s new government published its first annual budget yesterday (6 July). Despite apparent support in some political circles for a loosening of the laws restricting foreign investment in Indian retail, the budget made no mention of any reform. However, as Dean Best reports, the likes of Wal-Mart, Tesco and Metro Group should still be cheered by India’s plans for modernisation.


When India elected a new government in May, fevered excitement rushed through the country’s stock market.


On the first trading day after the result was announced, Indian stocks jumped 17% as the market pinned its hopes on a belief that a new government, free from the shackles of factions on the Left, would set about reforming the Indian economy.


The speculation mounted in the run-up to the government’s first budget, unveiled yesterday (6 July). India’s business community was awash with rumours about the level and type of reforms in the offing and, just last week, the spotlight swung onto India’s fledgling food retail sector. A key government report argued that the country should end its ban on foreign companies being able to own and open food retail stores.


There was, then, some disappointment that the prospect of an end to the ban did not feature in yesterday’s budget. Despite its apparent greater freedom to outline a set of pro-market reforms, the Indian government unveiled a budget that focused on improving the lives of the country’s vast, poor, rural population.


Finance Minister Pranab Mukherjee spoke of the government’s plans for “inclusive development” as he announced a 37% leap in government spending and a series of infrastructure projects, including initiatives on transport, power and water. India’s fiscal deficit is to rise sharply but the government is keen to spur economic growth, which slowed to 6.7% in 2008/09 from three straight years at 9%.


Despite last week’s government report, the fact that there was no mention in the budget of a relaxation of the rules governing FDI in retail is unsurprising. It is an issue that has proved a political hot potato in India. There have been local protests at the expansion of the likes of Germany’s Metro Group and even domestic retailers, such as Reliance Retail, have faced opposition to its plans for a Western-style store network. Perhaps understandably, the new government has chosen to plough cash into the country’s infrastructure and improving the leaving standards of its rural poor before picking a battle on FDI with local opponents.


One would expect India’s indigenous food retail groups to be central to any opposition to the loosening of laws governing FDI. At present, non-Indian firms are forbidden from owning multi-brand retail outlets, although the likes of Wal-Mart and Tesco have formed wholesale cash-and carry ventures with local players like Bharti Enterprises and Tata Group.


However, Pantaloon Retail, India’s largest retailer, claims to be unworried about the prospect of greater foreign competition – should India’s new government relax the rules.


“We believe that an infusion of funds into the country would help,” a Pantaloon spokesman tells just-food. “We have achieved some critical mass and we believe that there is ample room for other players – both Indian and international.”


The spokesman says that Pantaloon, which owns the Big Bazaar hypermarket and Food Bazaar supermarket chains, have seen policy proposals on FDI reform come and go. He insists Pantaloon will wait until policy becomes law before reacting to greater foreign competition and that, in the meantime, the retailer is on-track with its own growth plans.


“What we have learnt is that it is better to respond to a situation which is ‘real’ instead of policy pronouncements,” the spokesman says. “We are on-track with our growth plans. The slowdown in the world economy and the resultant impact on some sectors like real estate may have seen a slight delay in our roll-out given that properties were not being handed over on time. What has not changed is our objective of having 30m sq feet of retail space in operation by 2012-13.”


Metro is continuing to grow its cash-and-carry business and opened its fifth wholesale store in India in Kolkata in December. A spokesman for Metro Cash-and-Carry refused to be drawn on the budget announcement but acknowledged the Indian government is “more focused” on rural modernisation and investment in infrastructure thanon FDI reform.


However, he admits the retailer is looking forward to further reform of the sector. “We are working closely together and in a constructive way with the authorities in order to improve the overall market conditions,” the spokesman says.


“We hope [deregulation will take place] as soon as possible. But India is a huge and very fragmented country and the process of decision-making sometimes lasts longer than in other markets.”


US retail giant Wal-Mart, which has teamed up with local conglomerate Bharti Enterprises to run wholesale venture Bharti Wal-Mart declined to comment on the budget but a spokesperson claimed India now had a “progressive” government in place. The spokesperson said that, Bharti Wal-Mart, formed only a matter of months ago, is “optimistic” economic reform will take in place.


“Retail can be an engine of growth not just in urban India but also in Tier II and Tier III towns offering more job opportunities and helping families to save money so they can live better,” the spokesperson tells just-food. “FDI in retail can only help accelerate this process.”


Nevertheless, while foreign retailers are coy about expressing their views on India’s budget, the projects drawn up by the country’s government could help solve some of the economy’s key challenges, including in distribution, logistics and in agriculture.


The Indian government has earmarked further investment in the country’s agriculture sector and it has also pledged to provide an extended period of debt relief to local farmers. The budget also included reforms to the way infrastructure projects are financed in a bid to speed up the modernisation of parts of the country.


Industry watchers have long talked of India has a market of great potential – but with the caveat that, in comparison to China, the country’s economy remained very under-developed.


Yesterday’s budget may not have given the world’s top retailers – and free marketeers more broadly – the reforms they were looking for. However, the Indian government’s plans could lay the important ground-work needed for the country to fulfil its promise of soon being, as a recent report forecast, “a veritable commercial goldmine”.

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