In September last year, India’s government relaxed regulations allowing foreign direct investment (FDI) in multi-brand retail. One year on and the reaction from international investors has been lukewarm. Michelle Russell takes a look at why international grocery retailers have not yet taken advantage of the new rules and whether this is likely to change in the foreseeable future.

Internal and external political and economic forces have all had an influence on the terms and conditions surrounding foreign direct investment in India over the last few years.

To date, while international retailers like Wal-Mart and Tesco have opened wholesale, business-to-business stores in India, consumer-facing grocery retailing has been dominated by domestic players, primarily due to government rules and laws for doing business in the country. The Indian government has since tried to relax the rules through reform, but international retailers’ desire for greater clarity is, at the present time, holding back potential investment in the country.

FDI has been a subject of contention for some time, both inside and outside of India. Local retailers were naturally concerned about their livelihoods being taken away from them, while foreign retailers had concerns over whether any investment was worth their while.

When India’s government finally allowed 51% FDI in multi-brand retailing in 2012, it was seen as a significant move. Investment in both single and multi-brand retailing was allowed with the condition 30% of all sales should be sourced from domestic small and medium enterprises. In addition, total investment in plant and machinery was not allowed to exceed US$1m and there were limits as to which cities investors could enter. Confusion over whether the 51% investment was to be made throughout the partnership or only initially, also added to the headache for potential investors.

According to Euromonitor retail analyst, Shabori Das, foreign retailers had “issues” with the initial reforms. “They were difficult to work out in a country like India,” she tells just food. “It didn’t really motivate them to enter so in July 2013 there were some amendments made to the policy.”

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In July, the Government eased restrictions, clarifying the size of the small industry that foreign operators will have to procure 30% of goods from. The new rules also defined small industry as companies that have invested no more than the equivalent of $2m in plant and machinery.

Of the initial mandatory investment of $100m, 50% is to be invested in back-end infrastructure, not including land and rentals.

The Government said it thought the amendments, in respect of small industry, would bring in “a balance between the business exigencies of the multi-brand retail trading entity and [the] intent of the policy, which is to extend the benefits of the FDI policy in multi-brand retail trading to a larger constituency of small industries”.

IGD business analyst Laura May believes the latest amendments have been “well-received” by the industry, particularly the provision of greater scope in choosing small local suppliers. However, she believes the changes may not be enough to entice international retailers to speed up their plans to invest.

“A number of key issues remain,” she says. “Store development remains limited to greenfield investment, and [there is] uncertainty over which states will allow FDI, despite extension to cities with populations under 1m.” She also points to the continual depreciation of the rupee against the dollar.

Since the reforms, no multinational food retailer has made a move to set up multi-brand outlets in the country.

Wal-Mart Stores initially welcomed the relaxation of the rules but still insist the rules need working on.

Earlier this month, the world’s largest retailer dissolved its joint venture partnership in India with Bharti Enterprises. The two companies, which operate 20 wholesale stores in India, will now own and operate separate businesses in India. Wal-Mart will take on the two companies Best Price Modern Wholesale cash-and-carries.

When it announced the end of its venture with Bharti, Wal-Mart insisted it was still committed to India but said the rules surrounding consumer-facing stores still needed to be looked at.

“Through Wal-Mart’s investment in India, including our cash-and-carry business, supply chain infrastructure, direct farm program and supplier development, we want to serve India and its people, and continue to make important social and environmental contributions to the country. Walmart is committed to businesses that serve our members and provide good returns for our shareholders, and we will continue to advocate for investment conditions that allow FDI multi-brand retail in India,” Scott Price, president and CEO of Wal-Mart’s operations in Asia, said.

Tesco, meanwhile, has a partnership with Indian conglomerate Tata Group. The UK retailer runs cash-and-carry outlets with Tata, the Indian conglomerate and operates Tata’s Star Bazaar multi-brand stores for the Indian company on a franchise basis.

Other partnerships in the country include a deal between Auchan, which operate 13 hypermarkets under a franchise agreement with Landmark Group’s Max Hypermarket India. Elsewhere, Metro Group and Carrefour operate wholesale operations in the country.

Many analysts believe investors are holding back on investing until the outcome of India’s general elections are heard next year.

“There have been some foreign players that have entered India, but investment has been held back by uncertainty around foreign investment regulations,” Anil Talreja, partner at Deloitte Haskins & Sells tells just-food. “Indian players are expanding, but to an extent they are also holding back to see what happens with foreign investment. After the election, it is expected that government policy will be made clear, there will be an increase in investment and modern retail will expand.”

May concurs.M “Considering 2014 is an election year, what is now happening is companies are thinking, what if there are more changes under a potential new government. Within ten months there have already been changes. Under a new Government, further potential changes may be better. That is why investments are being held off.”

Whatever the outcome of the elections and regardless of any further reforms, the current relationships and networks that exist could form strong foundations for any future investment in India.

Pinakiranjan Mishra, partner and national leader for retail and consumer products at Ernst & Young in India, suggests the Government could do a bit more to encourage investment.

“It could engage more with global retailers to clearly spell out the agenda of the government proactively, address the questions of retailers on areas like investment, local sourcing, location of stores, etc, and provide a roadmap for retail reforms to the extent possible.”

If greater clarity can be achieved for international retailers once the elections are done, then the floodgates for further investment in India could well and truly open in 2014.