Moves last week by the Indian government to open the country's multi-brand retail sector to foreign investment have been hailed as everything from a "historic decision" to a "big bang" reform.

But observers also warn that far from reviving economic growth, the plans come with so many restrictions that they may well deter overseas firms from investing in the country. And the prospect of strong opposition from within the ruling coalition may also mean the measures have to be abandoned before they have a chance to get off the ground.

After all, relaxation of foreign direct investment (FDI) rules in India has long been a contentious issue, and it was just nine months ago that a similar plan was rolled back in the face of fierce opposition.

At the time, the government was able to ratify its decision allow up to 100% FDI in single-brand retail - but was forced to suspend plans to extend FDI to 51% in multi-brand retailers.

It now hopes the latest raft of reforms settle outstanding concerns about easing investment restrictions.

Under the proposed new rules, multi-brand retailers such as Wal-Mart, Tesco and Carrefour will be allowed to own a 51% stake in supermarkets, but with conditions that include:

  • Opening stores only in those states that have agreed to allow FDI in multi-brand retail;
  • Opening stores only in cities with a population of more than 1m or, in states with no such cities, as agreed with individual state governments;
  • Investing a minimum of US$100m;
  • Putting at least half of the total investment in 'back-end infrastructure' within three years, including manufacturing, distribution, design, quality control, packaging, logistics, storage, warehousing; and
  • Sourcing at least 30% of merchandise domestically, regardless of the size of the vendor.

This last point also applies to single-brand operations in India. At the moment, if they have more than 51% foreign investment, at least 30% of merchandise must be sourced from small and mid-sized Indian companies, artisans and craftsman.

Who stands to benefit?
The changes would enable single-brand companies to take complete control of their Indian businesses, as long as 30% or more of the merchandise on sale is already sourced locally.

It's an attractive market, since India's single-brand retail sector is valued at roughly $7bn, and is expected to reach $20-25bn in value over the next five years. The country also boasts a growing population, including 300m individuals identified as 'middle-class' with a purchasing parity equivalent of $30,000/year.

As retail consultancy Third Eyesight notes, this is an important change and "opens up possibilities of sourcing from the retailers' current supplier base that may comprise of larger companies." It may also lead to the growth of Indian companies who benefit from being plugged into the retailers' global supply chains.

However, the management consultancy also points out that, conversely, for multi-brand retailers the sourcing stipulation remains a significant barrier, "since neither the retailer nor the SME vendor base would be able to draw upon efficiencies of scale with growth of the retailer's business in India, nor benefit significantly from any export opportunities presented by the retailer."

It also notes that the local sourcing requirement will remain a barrier for brands that do not source any significant volumes from India.

The changes would also mark a milestone for international retailers of multi-brand products who have until now been restricted to cash and carry formats and "back-end" supply businesses. "This is a significant motivator for global retailers who are looking at future decades of expansion," Third Eyesight says.

The Washington based US-India Business Council (USIBC) describes the government as "courageous" for making another attempt to push through the reforms, and says it "serves as an assurance to investors that its economic liberalisation agenda is back on track."

"India's supply chain infrastructure will see improved efficiencies and expertise, consumers will benefit from increased quality and choice, and inflation and rising food costs will be tamed," says Ron Somers, president of USIBC. "These big bang reforms send a crystal clear signal that India is open for business."

Meanwhile, the Confederation of Indian Textile Industry (CITI) hails the decision for encouraging organised retailing and its centralised procurement and improved supply chain management. This, in turn, will reduce costs for businesses and prices for consumers, especially for textiles, and push up consumption," its chairman SV Arumugam claims.

The Apparel Export promotion Council (AEPC) agrees that the move "will give a much-needed fillip to the entire textiles industry." Its chairman, Dr A Sakthivel, notes employment opportunities, increased manufacturing activity and a rise in demand for cotton products and yarn are among the likely benefits.

"Domestic demand is going to pick up," he enthuses, adding: "It will lead to easing of inflation in the country and small and medium enterprises will also benefit out of this policy change. Gradually GDP will pick up and economic outlook will improve."

"This historic decision is going to be beneficial to domestic textile and garment export industry in a big manner and would also encourage overseas big retailers to source from India."

A note of caution
But it's important not to get too carried away just yet.

Fierce opposition from both outside and within India's coalition government means there is no guarantee policy decisions will go ahead.

Indeed, Mamata Banerjee, founder and leader of All India Trinamool Congress, Chief Minister of West Bengal and member of India's ruling coalition, has already announced her opposition to the reforms.

A key catalyst in last year's abandoned attempt to drive change, she said yesterday (18 September) that the Party would resign in protest over plans to open the door to foreign investment in the retail sector.

Leftist parties have also called for a national strike on Thursday in protest at the plans and at other reforms announced last week, including a hike in diesel prices.

Another word of caution comes from Jon Copestake, retail analyst at the Economist Intelligence Unit. He notes the situation arising "appears to be identical to the postponed attempt to do so last December, when the government approved the easing of restrictions but was forced to backtrack by widespread popular opposition. It may still be premature to see the measures succeed in becoming law."