India's latest FDI measures run into trouble- Part 2

2nd October 2012 by The Harried House Hunter

In December 2011 the Indian government did away with the 51% cap on Foreign Direct Investment (FDI) into single-brand retail chains. From that moment foreign based specialist chains such as IKEA had the right to launch in India, provided they source 30% of their stock from Indian companies. That move did not prove particularly controversial and that seems to have helped the Government to pluck up the courage to reintroduce the idea of allowing 51% FDI in multi-brand retailing.

As we saw in Part One, this would, at a stroke, open the way for the likes of Walmart and Tesco to buy controlling stakes in existing Indian retailers and shape them to fit their approach and brand values and the idea has stirred up both enthusiastic support and vehement opposition. The Indian Prime Minister, Manmohan Singh has been rather clever and may have found a way of taking some of the sting out of the opposition, because he has left it up to individual Indian states to decide for themselves if they will allow foreign chains into their province or not. Some states have already made it plain that they will not implement the ruling. Others have welcomed it.

The idea of allowing 51% multi-brand retail for foreign players is a reintroduction because the idea was first mooted over a year ago and was dropped when the second largest party in the Congress, the Trinamool Congress, led by Mamata Banerjee, came out strongly against it. Banerjee has let it be known that she is no more enamoured of the idea this time round than she was when it was first introduced, and, at the time of writing had organized a nation-wide “bandh”, the Indian equivalent of a general strike, which paralyzed transport and retail on Thursday 20th September.

However, Indian commentators are fairly clear that Banerjee is unlikely to be able to bring the Government down by walking out of the coalition, so her opposition, while a headache for the government is not the killer move it might have been a year ago. Banerjee is also claiming that the whole FDI in retail and aviation controversy is simply Manmohan Singh’s sly way of deflecting attention from a massive scandal in the coal sector in India. Since this will be the subject of a blog shortly, I won’t develop it here. The main point is that given the scale of the opposition being mounted against multi-brand FDI, even although the government feels it has won a mandate from the people to proceed, the political risk of a flip flop, which would see the government reversing its latest decision on FDI and disallowing entry, has to be a huge disincentive to potential foreign supermarket chains.

The major reason cited most frequently for opposition to the idea of Wal-Mart or Tesco coming into India in a big way, is the often heard prediction that the arrival of a big supermarket chain in a town inevitably kills off a lot of small traders, fruit and veg shops, convenience stores and the like. Raman Singh, the Chief Minister of Chhattisgarh and the BJP leader echoed the views of several leaders of other Indian states when he said:

“We will not let such a decision to come in Chhattisgarh.”

The rationale for this was expressed by D. Raja, the National Secretary of the CPI (Communist Party of India)

“This is not good for the small and marginal farmers. Government is acting in the interest: of corporates and investors.”

The sentiment was echoed by Narendra Modi, Gujarat Chief Minister and BJP leader

“I don’t know what the Prime Minister is doing. Smalltime shopkeepers will have to close down due to this decision. Cheap goods produced elsewhere will be dumped in India and it will affect the manufacturing sector of the country as manufacturers of small items will find it difficult to survive. This will lead to massive job losses for the youth.”

In reality, of course, as I pointed out in Part 1, the supply chain practices of the big global supermarket chains are highly sophisticated and will, in all probability revolutionize a sector that is fragmented and that currently does extremely badly by farmers. India’s retail sector is about as far from cutting edge as it can get and is in severe need of very substantial investment. The consensus opinion from analysts is that the infusion of top western management skills will be positive for the Indian economy, not negative. The passage of a few short years will make it plain who is right and who is wrong, but there is a chance that political opposition to opening up the country to the big foreign retailers will prove too much for Prime Minister Singh to overcome.

Further information on emerging markets and India

This blog post was originally published on QFinance by Anthony Harrington.

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