World reads fine print on India’s retail FDI invite

Shares in Indian retailers jumped — bucking a fall on the wider stock market — as they should tie up deals with these big foreign retailers.

The move may breathe new life into the government of Prime Minister Manmohan Singh,who ushered in free market reforms 20 years ago,but has been bogged down by corruption scandals and was starting to be seen as a lame duck.

As well as appealing to India’s burgeoning urban middle class the reform will draw in much-needed new investment to a sputtering economy. Policymakers say spending on cold-storage and warehousing will ease supply side pressures that have driven inflation close to a double-digit clip.

It’s important not only for raising overall growth,but also for containing inflation and improving the quality of life for over 50 percent of the population,said central bank Governor Duvvuri Subbarao.

The move,opposed by millions of small shop owners who fear for their livelihoods,prompted an uproar in India’s parliament which was forced to close until Monday.

RIDERS

To appease its opponents,the government insisted foreign retailers source almost a third of their produce from small industries,invest a minimum of $100 million in India and spend half of that on back end infrastructure.

Foreign stores will only be permitted in cities of more than 1 million people,and individual states will decide whether to allow the global giants on to their patch,Industry Secretary P.K. Chaudhary said.

That could,for example,exclude investor-favourite states like Gujarat,which is run by the opposition Hindu nationalist Bharatiya Janata Party that opposes new foreign supermarkets.

Trade Minister Anand Sharma said new investment would create 10 million jobs in the next three years and would not affect small shops,a claim scorned by parties on both the left and right who predict that millions of jobs will be lost.

The head of Walmart’s local cash-and-carry joint venture praised the move,but also struck a note of caution.

We will need to study the conditions and the finer details of the new policy and the impact that it will have on our ability to do business in India,said Raj Jain,CEO of Bharti Walmart.

TOUGH GOING

Domestic retail chains have operated in India for years,but have struggled to expand due to funding difficulties,a lack of expertise and poor roads and cold storage facilities.

If political opposition mounts,foreign firms could find the going tough.

India’s biggest listed company,Reliance Industries ,was forced to backtrack on plans in 2007 to open Western-style supermarkets in the state of Uttar Pradesh after huge protests from small traders and political parties.

Bijou Kurien,a senior executive at Reliance Retail,said the mood had changed now,and predicted new arrivals would have a smoother ride.

The regulatory and non-regulatory pressures in India are the way of life,he said. So any person running a business in India has to be able to figure out how to steer their way through all the obstacles that can be in their path.

He said the back-end and sourcing rules may stop big-box electronics stores from coming into India for now,but said the rules would likely soften in the medium term.

Thomas Varghese,CEO of another Indian retailer,Aditya Birla,said the power given to states could be a short-term hurdle,but he predicted most would say yes to supermarkets.

It most definitely will have an impact and reduce the number of places where foreign retailers can set up shop,but it will still not reduce the interest because 51 cities have a million plus population,he said.

In the past,big-ticket reforms have been held back by the devil in the detail.

In 2008,the government passed the U.S. civilian nuclear deal aimed at opening up India’s nuclear power market to foreign players,hailed as the cornerstone of India’s warming ties with the United States.

But investments have since languished due to stringent accident liability clauses that U.S. companies say make it too risky to invest.

FACTBOX: ‘We’re Open’,India tells foreign retailers

India has opened its supermarket sector to foreign retailers such as Wal-Mart Stores Inc,pushing through a major reform aimed at attracting foreign capital and potentially easing stubbornly high inflation.

The policy comes with provisos,which some analysts say could hamper firms hoping to set up shop in the world’s second-most populous country.

Following are some of the conditions:

SOURCING FROM SMALL COMPANIES

Retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than $1 million. Supermarket chains will certify compliance with this rule themselves.

The Industry Secretary said the government could not require companies source part of their produce from India as this would violate World Trade Organisation guidelines.

A similar rule will also apply to stores which only sell their own brand products. These companies,which can wholly own the stores they run in India,will have to buy produce from village and cottage industry artisans.

The government will reserve the first right to procure food produce from farmers before companies do,in order to provide stocks for its food subsidy schemes for poor households.

MINIMUM INVESTMENTS

Foreign retailers will have to invest a minimum of $100 million in India,at least half of which must be ploughed into so-called ‘back-end’ infrastructure,such as warehousing and cold storage facilities.

India’s industry secretary told Reuters there was no specified time frame for how quickly the $100 million would have to be invested.

The aim is to meet one of the key justifications for opening the supermarket sector to foreign players — revamping the country’s crumbling infrastructure and unclogging supply bottlenecks.

As much as 40 percent of India’s fruit and vegetable production is wasted because of poor networks and a lack of cold storage,with even meat sold from open air stalls on sweltering streets.

The bottlenecks fan inflation,which has remained at more than 9 percent for nearly a year and prompted a slew of rate hikes by the Reserve Bank of India.

Policymakers argue opening the sector will help ease prices for a country where hundreds of millions of people live in dire poverty,and who have taken to the streets in anger.

BIG CITIES

Foreign retailers will initially only be allowed to set up shop in cities with a population of more than 1 million.

Critics of the new retail policy,including from opposition parties and smaller,domestic traders,say opening the doors to the likes of Wal-Mart will wipe out the country’s small,family-run neighbourhood stores and trigger mass unemployment.

By restricting foreign firms to cities,the government hopes the supermarkets will become accessible to the country’s swelling middle class,while protecting the livelihoods of shopkeepers in smaller towns and rural areas for as long as possible.