India’s cabinet has voted to allow foreign investment in the nation’s $500 billion retail sector, a move touted by India’s Commerce Minister Anand Sharma, who hopes it will provide farmers fairer compensation and create 10 million jobs.
Potential investors, including retail giants such as Wal-Mart, Carrefour and Tesco, are eager to enter a market that analysts estimate will double to over $780 billion by 2015. Moreover, the Indian government promises foreign investment will curb India’s high inflation rate and low rupee, and reduce the waste caused by the rotting of 40% of fruits and vegetables prior to selling.
Nonetheless, the deal is not without obstacles, and strong opposition to this vote will see a meeting today of all parties in the government’s 13-party governing coalition in view of coming to a consensus on the issue.
There are also roadblocks within the legislation itself, the first of which are foreign ownership restrictions. Participating companies must invest at least $100 million in the next five years, and look to small and medium sized firms to buy 30% of their merchandise. Foreign supermarkets are also limited to setting up in only 53 Indian cities with a population of 1 million or more.
Due to financial constraints or perceived lack of benefit in making such a large investment perhaps only 5 to 10 international companies would be suitable for this deal. Rules on minimum procurement are another deterrent for smaller chains.
Estimates on future inflow from foreign investment in India’s retail market range from a conservative $8 billion to over $30 billion. Many of the deals made immediately may involve a foreign buyout of stakes in existing Indian chains, rather than the establishment of new stores. Sharma’s promise of fair wages and new jobs may not be realized for another five to 10 years.
The entry of large foreign chains in India’s economy faces opposition from coalition partners such as the Bharatiya Janata Party, the main federal opposition, as well as the Trinamool Congress and the Dravida Munnetra Kazhagam. They feel this move will cause job loss rather than creation, and push small shopkeepers out of the market.
There is also opposition from states including West Bengal and Tamil Nadu, which could hinder companies requiring state-level permission to set up stores.
Change Slow Coming
This decision represents the first significant change in India’s legislation on foreign ownership in five years. Further, it is the culmination of seven years of discussion on this topic.
However, the government’s decision to press forward despite opposition and at the tail end of a year-long policy freeze due to accusations of corruption against certain government officials may be a positive sign.
At a recent press conference, Sharma said, “The step which we have taken is an investment in the present and the future of this country . . . and it will have a multiplier effect on the economy.”
Key Statistics – Foreign Direct Investment in India (Source: India Brand Equity Foundation, October 2011)
- India could draw up to $80 billion in Foreign Direct Investment (FDI) in the next few years.
- In the last two years the Indian economy has received about $48 billion in FDI.
- Given recent trends, officials predict that FDI in 2011-2012 could exceed $35 billion.
- Between January and August 2011, incoming FDI in India increased by 50% to over $20.75 billion.