India Update: Foreign Direct Investment in Retail

December 11, 2012

Steve Rowen

By Ramesh Sethuraman, Contributing Editor

India is changing. According to a report by AT Kearney, organized retail is expected to account for 25% of the overall market in India by year 2020, in stark contrast to the existing Indian market place, where the majority of retail is conducted via unorganized, mom and pop sellers. The report also said that India remains one of the most favorable destinations for global retailers and can expect to experience 15 – 20% retail growth over the next five years.

Exactly one year ago, the Indian government (ruled by the United Progressive Alliance, or UPA) tried to introduce a bill in parliament to allow Foreign Direct Investment (FDI). Last year, RSR research published an article detailing what FDI and its implications were for India.

Today, let’s examine what’s developed in the last 12 months.

Current Political and Economic Situation

People recall India as the nation which gave the world one of its foremost icons of non-violence, Mahatma Gandhi. Yet while under British rule, the nation and its leaders fought against imported goods. They believed the “Swadesi” movement (developing a domestic market) was the only way to build a strong nation with a sustainable economy.

Currently under the rule of United Progressive Alliance (UPA-II) and lead by the Indian National Congress Party (INC), Indian citizens’ confidence in their government is at an all-time low. This is primarily due to the following reasons:

  • Poor economic policies being  imposed against the interest of the nation and its people
  • The number of massive-scale scams exposed in the last couple of years; quite literally one after another (e.g. 2G Spectrum Scam, Coal Scam, land scams…)
  • Government protection of black-market funds being  stashed in overseas tax havens
  • A 7.5% inflation rate and its continued slowing effect on the industrial sector
  • Fuel price hikes in spite of global oil price drop
  • The rationing of household liquid propane gas supply (used in most Indian homes for cooking) has encouraging black market transactions

Adding to the above, a country with great heritage is constantly in the news for all the wrong reasons, including:

  • World Bank’s recent report citing India as one of the toughest countries to do business in. (132nd in a list of 185 countries)
  • Globally, India ranks 94th in 2012 Corruption Perception Index
  • Mr. Ratan Tata, the outgoing chairman of one of the country’s most respected global business houses (TATA, which in addition to owning Jaguar and Land Rover, provides global consulting services), recently expressed worries on scams and retrospective taxation.

The UPA government’s position

UPA government has brought back a Multibrand Retail FDI bill in the current parliamentary session. Interestingly, last year, Trinamool Congress (TMC) a strong regional party from West Bengal which previously supported the government changed its tune by threatening to withdraw support. Later, the congress government got rid of TMC from its alliance and yet managed to survive by arm-twisting two other regional parties from another state called Utter Pradesh.

This time, the government was very confident of winning the vote in two houses, namely “Lok Sabha” and “Rajya Sabha”. After lot of drama, the FDI bill won majority in the house. This is in spite of a few political parties which irresponsibly abstained from voting and even further, a few others which voted in favor of the FDI bill for political quid-pro-quo.

What is the Opposition’s Stance?

The National Democratic Alliance (NDA), is a coalition of parties which are seated against the UPA government in both houses. One of the leaders from NDA has given a statement saying that FDI would be scrapped if the NDA was voted to power during next term. However, people are not ready to believe the opposition’s promise either.

Why the Commoners Oppose FDI in Retail

Indian citizens don’t blindly oppose FDI. They do welcome FDI in sectors such as infrastructure development, aviation, automobile manufacturing, etc. But they do oppose FDI in such sectors as retail and  insurance: the segments which would impact them most significantly.

In the case of retail, India has millions of street side vendors and mom and pop stores. If we look deep into the ecosystem, it is comprised of local farmers, middlemen and local transportation players. Every one of them  fears an invasion of global retail giants, and view FDI as a threat to their survival.

Yet the biggest fear is that the international players will source globally and then dump products in India at lower prices, effectively killing off India’s small players. This also has been seen as a major threat to local farmers and their produce. Moreover, people fear that with the money and power global retailer have, they could then procure essential goods, overstock them, and create an artificial demand.

While government talks about new jobs created due to FDI, they are hiding the greater number: that of jobs and small businesses that would vanish. A mere 20% of small scale players’ business being taken away means millions losing their livelihood. Unfortunately, many of them neither no alternative source of income and would not be employable in the corporate retail sector.

Reaction of Existing Large Players

Most major retailers across the country are either running at a loss or sitting on pile of debt. They have acquired real-estate and set up basic operations in hopes of selling to international giants looking for a jump-started operation.

On the hand, several existing large Indian retailers are cursing the government’s actions, as it has taken little measure to level the playing field. While players like Walmart are already cash rich, they can also get a loan with interest as low as 2%; a local players’ interest rate would be 14%.  This gives an additional unfair advantage to the international retail giants.

Walmart in India

In 2007, Walmart announced an agreement with Bharti Enterprises (a leading telecom service provider) to establish a joint venture, Bharti Walmart Private Limited, for wholesale cash-and-carry and back-end supply chain management operations in India. Walmart currently operates 20 stores across India.

RETAIL RACE
Company

Year of first
store in India

Total no of
India stores

Opened in Year 2012

Bharti Walmart

2009

20

5

Metro

2003

14

5

Carrefour

2010

3

1

Source: Companies

Whenever the topic “FDI in retail” has been brought up, by default it is linked with Walmart. Mrs. Hillary Rodham Clinton has made few a visits to India without any pressing need. But people were speculating that her visits were to press the government on FDI on behalf of the giant “W”. This is only compounded by her Arkansas roots and the fact that she has served as a member of Walmart’s Board of Directors.  .

Wal-Mart was waiting for years to open its supermarkets in India –and  has been lobbying with US lawmakers since 2008 to facilitate its entry into the highly lucrative Indian market. As per the lobbying disclosure reports filed by Walmart with the US Senate, the company has spent close to $25 million (about INR 1.25 billion) since 2008 on its various lobbying activities, including those issues related to “enhanced market access for investment in India”.

The company spent $1.65 million (about Rs 10 crore) on various lobbying issues just last quarter, including “discussions related to FDI in India”.

Walmart is currently facing 2 legal challenges:

  • The world-wide probe into potential Foreign Corrupt Policies Act violations at Walmart’s international subsidiaries continues to intensify. A leading Indian financial publication, the Economic Times, reports that employees of the retailer’s India unit’s Chief Financial Officer and members of Bharti Wal-Mart’s legal team have been suspended pending further investigation.
  • Wal-Mart prepared its entry into India’s supermarket sector in 2010 with a $100m investment into a consultancy with no employees, no profits and $14,000 in revenue. The company, called Cedar Support Services, might have been a more obvious selection four months earlier: it began its corporate life as Bharti Retail Holdings Ltd, according to documents filed with India’s Registrar of Companies. The Cedar investment is now the focus of an investigation by India’s financial crimes watchdog into whether Walmart broke FDI rules by putting money into a retailer before the government threw open the sector to global players.

While Walmrt says that it has provided “information and clarification”, (something India’s central government had sought), some lawyers say that the transaction appeared to violate at least the spirit of India’s long-standing ban on foreign investment in supermarkets, which only lifted in September 2012. When Walmart made the investment in 2010, it was legal for foreigners to own consultants but not retailers, so the shift in Cedar’s business description raised eyebrows.

Conclusion

Now the interesting set of questions in front of us are:

  • Who are the global players to follow Walmart’s trail to India?
  • What would be the next move for Walmart? Will it be acquiring existing retailers for rapid expansion?
  • Will Chinese retailers and manufacturers invade India?
  • What will be the international retailers’ infrastructure investment?
  • What is the impact of multi-brand FDI on the local small scale player?

All I can say at this moment is that there are very interesting days ahead for India and Walmart. Let’s wait and see whether India is another Mexico or China story for the world’s largest retailer.

 

 

 

 

 

Reference Articles:

http://indiatoday.intoday.in/gallery/coal-scam-how-india-lost-rs-1.86-lakh-crores/1/7610.html

http://www.financialexpress.com/news/why-has-india-s-industrial-growth-slowed-down-/94662

http://timesofindia.indiatimes.com/business/india-business//articleshow/17544683.cms?

http://www.jagranjosh.com/current-affairs/india-ranked-94th-in-2012-corruption-perception-index-released-by-transparency-int-1354859196-1

http://entrepreneurindia.in/thebuzz/specialreport/doing-business-in-india-is-tough-as-ever-says-world-bank/15906/

http://www.livemint.com/Opinion/TUWKY7UUabnhk2LCZwjj3J/Retail-FDI-an-imagined-solution.html

http://www.livemint.com/Opinion/JdtQbDqoSV4Fk0IwQKKAFK/A-country-for-middlemen.html

http://www.livemint.com/Politics/7CNbGN7NNHY1JUwWZvUSuN/Retail-FDI-to-be-scrapped-if-NDA-forms-govt-Joshi.html

http://economictimes.indiatimes.com/news/politics-and-nation/did-walmart-bribe-its-way-into-india-opposition-seeks-independent-probe/articleshow/17559593.cms

http://www.hindustantimes.com/India-news/NewDelhi/Big-ticket-reform-cleared-UPA-govt-gets-Parliament-nod-on-FDI-in-multi-brand-retail/Article1-969703.aspx

http://www.business-standard.com/india/news/carrefour-ends-yearjust-one-new-store-in-india/495116/

http://ibnlive.in.com/news/walmart-spent-rs-125-crore-on-lobbying-to-enter-india-report/309563-7.html

http://online.wsj.com/article/SB10001424127887324352004578136124135423826.html

 

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