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    South Asia
     Dec 3, 2011

'Big-box' protests test India's FDI strategy
By Benjamin Shobert

The furious domestic reaction in India, including nationwide protests, to the government's decision to allow foreign big-box retailers such as Walmart to enter the local market shed new light on how far India still has to go in opening up to foreign direct investment (FDI).

On Thursday, small neighborhood kinara shops closed their doors in an act of solidarity and protest over the government's plans. Many outside the country are perplexed over what to make of the loud resistance to what they assumed would be a reasonably easy domestic reform for the Indian government to enact.

For US-India economic ties, the last two weeks have been some of the most interesting in several years. The Indian cabinet voted

last Thursday to allow 100% FDI into what are called "single-retail brand" operations, which are cash-and-carry stores that, according to the Wall Street Journal can "only sell to other retailers and businesses", and 51% FDI into what the government calls "multi-retail brand" stores.

The Indian retail market, currently estimated to be worth $295 billion, is a highly fragmented opportunity that offers much of the same allure to big-box retailers as does China's since both countries appear to be developing increasingly vibrant middle classes.

Within the Indian government, the Bharatiya Janata Party and the Communist Party of India have been the most vocal opponents to this most recent economic reform. Ostensibly, the opposition in India fears that the entrance of large American and European multinational retailers like Walmart, Tesco and Carrefour would drive India's small neighborhood retail establishments out of business.

A recent study on India's retail market showed that 97% of the entire Indian retail market is currently run by "unorganized retailers like the traditional family-run stores and corner stores". This is an important political constituency and one that the reform-minded Prime Minister Manmohan Singh understands will need to be placated if any of his additional economic reforms are to have a chance.

In recognition of these fears, the cabinet has stipulated that foreign retailers can only make these investments in cities with more than one million people.

Some have been quick to suggest that the political uproar surrounding this seemingly straightforward policy adjustment points towards deeper problems within India relative to how the country embraces globalization. In fairness to those who hold these opinions, the significant disparity of FDI flowing into China versus India does suggest, among other things, that China has been an easier destination for FDI over the last 20 years.

Estimates of FDI inflows between the two countries show that for the period 2001-2006, China outpaced India by a factor of almost nine, a clear indication about where the world's investors would rather deploy capital when choosing between the two countries.

India's historical baggage about allowing FDI has a lot to do with the bad taste left in its mouth after having been ruled as part of the British Empire. This historical experience coupled to the lasting reputational and cultural damage from the Swadeshi movement in 1947-1948, which encouraged economic independence from outside influence, has left India sensitive to the question of how far it should allow foreign firms into its domestic markets.

More recently, in 1973 India's Foreign Exchange Regulation Act (FERA) led to the ultimate exit of IBM and Coca-Cola from the Indian market; however, government actions since then (in particular the 1993 Liberalization policy) have led many to believe that India may soon rival China as a lucrative destination for FDI. Certainly for retailers like Walmart that are becoming more and more successful selling into the emerging market in China, the untapped and highly fragmented consumer retail market in India is very exciting.

Since the 1993 Liberalization policy, FDI into India has increased, with the primary sector that has benefited from this inflow being the services sector, followed by information technology. Successful entrepreneur and political figure Lord Karan Biimoria commented this week that he anticipated this recent move to allow 51% FDI into retail would open the doors for "the private sector to get into the field of infrastructure".

The hope is that the nascent economic reforms put forward over the past several weeks will pave the way for additional much-needed FDI in the areas of infrastructure, higher education and airlines - to name just three of the highest profile areas.

Critics of India's past policies towards FDI should look not only at what India has done and where it is coming from, but the parallels between its halting embrace of FDI and China's experience shielding state-owned enterprises (SOEs) from its own domestic economic reforms.

While dissimilar in a literal sense, they both have similarities regarding the challenges emerging economies face when entering the globalized world. As we are still seeing play out in US-Sino economic policy, the role of China's SOEs remains a sore point for American and European multinationals.

The larger point that unifies what is going on in China with what has been happening in India over the past two weeks is that emerging economies are much closer to political turmoil and economic collapse than developed economies tend to appreciate. As such, they have to walk the line between embracing the international rule sets that empower and enable globalization than developed economies (who, it should be pointed out, also wrote many of these rules for their own benefit).

India remains the next major emerging economy that, as it opens, will begin to draw additional investment and energies from American and European companies. The challenges in India are going to be different from those in China, in particular because India's political culture is much more diverse than China's, because India's focus is already on high-technology versus manufacturing, and because India's infrastructure remains woefully lagging compared with China's.

Regardless, how India's government manages the political fall-out from allowing foreign retailers to enter the domestic market will send a strong signal to international business about how serious the country is about attracting FDI.

For a country like India, desperately in need of outside investment in its economy to improve infrastructure, healthcare and education for its citizens, its management of this most recent turmoil is a critical step forward in a process of economic reform that has only just begun.

Benjamin A Shobert is the Managing Director of Rubicon Strategy Group, a consulting firm specialized in strategy analysis for companies looking to enter emerging economies. He is the author of the upcoming book Blame China and can be followed at www.CrossTheRubiconBlog.com.

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