Manmohan tries tiptoe for retail
FDI reform By Benjamin Shobert
The year has begun with what might be
charitably called a "confusing" note within the
Indian retail market. In 2011, nascent efforts at
economic reform, specifically those related to
allowing additional foreign direct investment
(FDI) into India's fragmented retail market by
international multi-brand retailers, were poised
to move forward, only to come to a fractious halt
as the year came to a close.
Allowing FDI
into the retail market was part of plans for
larger economic reforms in education,
infrastructure and transportation that Prime
Minister Manmohan Singh has wanted to put forward.
It was seen by many as an opportunity to send the
message to the international community that India
recognized its need to get more serious about
economic reform, and that it could be trusted to
see such reforms through to the bitter end. In the
event, politics
unmistakably signaled
that this was not to be.
Around the
country, activists fearful of foreign influence
found common cause with neighborhood kinara shop owners.
Together, they took to the streets loudly
protesting that this sort of FDI would devastate
the vibrant, if fragmented and inefficient, retail
industry. Protesters with signs found their way to
the streets, bearing placards which said "FDI =
Fast Death Instrument".
Admitting the setback, Manish Tewari, a
spokesperson for the All India Congress Committee,
reflected that the political left still "sees
multi-national companies as some kind of
neo-imperialists, who will gobble up [the] Indian
economy".
News of this setback
reverberated around the world, in no small part
because international economic attention has been
increasingly focused on whether the BRIC countries
- Brazil, Russia, India, China and South Africa -
have enough economic and political vitality to
pull the world forward as the economic crisis in
the West appears set to move into a new, and
potentially disruptive, phase across the eurozone.
India's ongoing difficulty in opening its
economy to outside investment remains troubling
not just because it keeps a potentially important
market walled off from outsiders, but also because
it suggests the country does not have the
political will (or some would suggest, the desire)
to pursue economic reforms in the first place.
Perhaps with these concerns in mind, the
Manmohan government last week announced a reform
that is designed to take a meaningful, if timid,
step forward relative to FDI within India's retail
market. The announcement, while coming up short of
the sort of changes he had originally hoped for,
represents reforms that appear to be politically
tenable now. Specifically, it opens the door for
what the Indian government calls "single-brand
retail" establishments to be wholly foreign-owned.
As part of the plans, foreign retailers
that want to achieve full ownership instead of the
previous 51% limit must agree to purchase at least
30% of the goods they sell at retail from local
industry. In addition, the government also said
foreigners may directly purchase up to 10% in
aggregate of Indian companies, an important move
designed to further signal India's awareness that
it needs outside capital, expertise and partners
to modernize the economy.
Industry
watchers are pleased to see these moves,
originally announced as part of the November
multi-brand retail FDI plans, go forward. The US
India Business Council praised last week's
commitment and noted that single-brand retail in
India was expected to grow to over $25 billion in
sales in the next five years from $7 billion
currently.
With inflation in India
approaching 9%, hopes are high that FDI in the
retail channel will do more than simply attract
outside capital; many hope that it will lead to
efficiency gains that can be translated into lower
costs of living for the average consumer.
Multi-brand retail policy most directly
impacts the neighborhood supermarket and grocery
stores. In contrast to this, single-brand
retailers are retail establishments that sell only
one brand - their own. This brand must be
international and universal. Only brands like Nike
and Starbucks stand to benefit from this most
recent announcement.
Consequently, many
fast-moving consumer products companies,
especially those that manufacture consumables,
will still have to wait for the retail
establishments like Carrefour, Tesco and Walmart
to arrive in India in force before they can hope
to access the wider market within the country.
But,
other single-brand retailers will benefit as India
makes it easier for them to wholly own their
operations. The longer it takes India to welcome
these retailers, the longer it will take for those
cost-of-living savings these companies enable to
be set in motion. Ironically, one of the first sectors that
might stand to benefit from last week's
announcement will be luxury goods, with
manufacturers like Bally, Coach, Hermes, Louis
Vuitton and Tiffany now able to expand more
aggressively without fear of having to have an
Indian partner.
Originally designed to
bring outside investment into a sector that drives
major inefficiencies and costs for the middle
class, such a move might be good for the wealthy,
but does little to benefit the struggling Indian
middle-class consumer because one of their primary
inputs, food, remains walled off from outside
competition.
It was hoped other
international single-brand retailers, the most
notable of which was expected to be IKEA, would
have viewed this announcement in a very positive
light. After all, industry analysts had
anticipated that a November 2011 trip to India by
IKEA's president and chief executive Mikael
Ohlsson would result in an announcement of the
company's plans to expand throughout the country.
But in the midst of the political backlash
after the multi-brand retail announcement, no such
announcement was made, only a tepid statement last
week that the company would "continue to evaluate
the guidelines of the FDI decision".
Questions remain about whether even this
most recent announcement might be vulnerable to
political setback; however, the consensus as of
this week is that FDI into single-brand retail
will be accepted with little pushback, if for no
other reason than it lacks as defined a
constituency that could be harmed - in contrast
with last year's multi-brand retail reform.
Such may be more hope than sound strategy;
after all, it was a realization by Manmohan's
political enemies that they could deal him a
serious blow by blocking his multi-brand reform
that led them to mount such a vigorous campaign
against it in the first place.
If now
these same parties come to believe they can again
present him with a major stumbling block, they may
attempt to do so. Were that to happen again, it
would signal to outsiders that India's economy, as
lucrative as it might be, is not politically ready
to handle the accountability and stability needed
to make it an attractive location for investment.
In the midst of an international economy
desperately in need of pockets of strength, such a
signal would be ominous not just for India, but
exporters in the developed West as well.
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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