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"
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
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
- 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
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
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
"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
"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
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
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
(This article appeared in just-style.)