Foreign retailers in India: has romance just begun?

By Priyanka Khimani, Mulla & Mulla & Craigie Blunt & Caroe
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Three golden words have got India’s pulse racing at the moment. It’s not the nation’s eternal romance with cricket or Bollywood. It’s a new found love affair with foreign direct investment (FDI)!

After teasing foreign investors for months, India allowed FDI in multi-brand retail up to 51% in December 2012 – a bold step for the government bearing in mind that retail is one of the pillars of the economy and accounts for 14-15% of GDP. With an economic value estimated to be US$450 billion, India’s retail market is among the top five in the world and the world’s fastest growing retail market, with 1.2 billion people.

Priyanka Khimani
Priyanka Khimani

The central government’s recent reforms for both multi-brand and single-brand retail have paved the way for multi-brand giants such as Walmart, Carrefour and Tesco, as well single-brand majors such as IKEA, Nike and Apple. With India allowing 100% ownership of single-brand stores subject only to the condition that 30% of the goods be sourced from India, IKEA announced an investment of ₹105 billion (US$1.9 billion) and 25 retail stores in India.

Less than a month after it cleared IKEA’s investment proposal, the Foreign Investment Promotion Board, clearly wanting to send a positive message to the international business community, cleared four other FDI proposals by single-brand retailers in one go last month. The proposals, totalling about ₹7.5 billion, include US watch and jewellery maker Fossil, and French sportswear giant Decathlon, fashion house Promod and crockery maker Le Creuset.

Caution prevails

While other single brands such as fashion giants H&M, GAP and Tommy Hilfiger actively explore India’s retail market, there has been a stony silence from international investors so far as multi-brand retail is concerned. The continuing inactivity and silence of players like Walmart, Tesco and Carrefour about their India plans tells a story that is out of sync with the government’s expectations. With opposition parties vowing to reverse the decision if voted to power, multi-brand retailers may prefer to postpone any significant investments in the Indian market until after the 2014 general elections.

The cautious approach of investors seems justified, particularly since FDI has been a topic of heated debates and constant arguments, both in and outside the parliament. Members of the opposition have time and again vehemently expressed their displeasure over the government’s decision.

Court challenge

The issue seems to have escalated to new heights with the Supreme Court of India directing the government to file an affidavit in response to a public interest litigation which was filed this January with the aim of quashing the notification permitting FDI in multi-brand retail on the ground it was illegal and would affect the livelihood of 350 million families. The petition stated that about 35 million Indians were self-employed in grocery shops, food, vegetables and other small businesses and more than 200 million people were trading on footpaths.

The Supreme Court, in an attempt to determine whether the policy was merely a political gimmick, asked the government whether it had received any FDI in multi-brand retail and asked what safeguards were in place to protect small traders. The government justified its decision by citing examples of China, Brazil, Argentina, Singapore, Indonesia and Thailand, where FDI was permitted up to 100% and still local retailers coexisted with organized retail.

The government downplayed the opposition’s concerns and told the court that the policy, when fully implemented, would touch the lives of only 13.3% of the country’s population living in 53 cities. It pointed out that the multi-brand retail policy was an enabling one and states and union territories were free to take their own decisions about implementing the policy in keeping with local conditions.

New woes

As if the government didn’t have sufficient woes, Nobel laureate American economist Joseph Stiglitz has expressed concerns that FDI in multi-brand retail in India would promote instability due to exploitative and corrupt practices adopted by multinational companies to monopolize a country’s retail markets. Denouncing the theory that FDI in retail will improve the supply chain and enhance the welfare of the farmers, producers and consumers, Stiglitz painted a gloomy picture of the retail scenario in India.

While the clouds surrounding FDI in multi-brand retail are yet to lift, economists forecast that Indian retail will nearly double in economic value, expanding by about US$400 billion by 2020. If the figures are anything to go buy, it seems like retailers stand to make a lot of money. Whether multi-brand retailers will continue to hold back while single brands make a headway with FDI in India or whether they will take the bold plunge and dive into the nascent foreign investment market is something we are all waiting to see unfold with bated breath!

Priyanka Khimani is an associate at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.

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