'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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