Wal-Mart, Carrefour and Tesco are champing at the bit to enter the Indian retail sector, but Foreign Direct Investment is unlikely to be permitted in the near future. Bhavna Rathore reports from India.
In a recent note on the subject, the communist parties of India, which are also part of the government, have opposed opening up the retail sector to Foreign Direct Investment (FDI). The parties on the Left argue that it would have a negative impact on the already grim domestic employment landscape. Furthermore, since employment generation was the cornerstone of the Common Minimum Program (CMP) of the ruling United Progressive Alliance (UPA), inviting foreign capital in employment-intensive sectors would have a debilitating impact on domestic employment and would go against the spirit of the CMP.
In 2005, the Indian government allowed up to 51% FDI in the single-brand retail segment. This allowed retail brands like Reebok, NIKE and adidas to operate their stores in the country. However multi-brand retail operators such as Wal-Mart and Tesco are still not allowed to operate in India.
An argument advanced by sections of the ruling coalition is that international retailers like Wal-Mart are unlikely to have the same commitment as domestic players such as Reliance and Pantaloon. Most notably the aggressive Reliance Group has plans to invest up to INR220bn (US$4.76bn) in the retail sector to open 2500 outlets across the country, including 1500 supermarkets and 1000 hypermarkets. A Wal-Mart or a Tesco is unlikely to offer such a large scale in India and is likely to focus only on the large cities.
The ruling coalition parties also seem inclined to let the domestic operators rule the sector as companies like Reliance have plans to set up a huge sourcing infrastructure across the country. This infrastructure will benefit the grass-roots farmers the most as they are likely to get better prices than before.
During the last two years the government has been debating the level of FDI that can be allowed in retail with popular opinion tilting towards 26-49%. However, recent government moves indicate that the issue has been shunted to the back-burner and the retail sector being opened in the near future seems very unlikely. In recent times, the government has increasingly toed the line of the left-wing parties. Only a few days ago the government suddenly rolled back its disinvestment plans for Public Sector Units (PSUs) due to pressure by the parties on the Left.
In such an environment, chances of a Wal-Mart or Tesco entering India soon are remote. Sources in the Bharti Group indicated that its mega-retail plans in which it is planning to partner with a major retail chain (Tesco, Wal-Mart and Carrefour are all in the running) are advancing with no great speed. Sources further indicated that it is difficult to take any decision till the government makes up its mind on the retail sector. They stated that it is likely that the decision will take at least six months with the first Bharti-Wal-Mart / Tesco / Carrefour store unlikely to open earlier than 2007.
The retail sector in India is highly fragmented, disorganised and disjointed. It is made up of more than 12 million small local grocery shops, most of which are family owned. About 96% of these shops have 500 sq-ft or less of space with limited stock or choice to offer and little capital for expansion or credit.