Investors await resolution on FDI in Indian retail industry

Investors are keenly awaiting clarity on the prime minister Narendra Modi’s stance on foreign investment into India’s US$500 billion retail sector.

The Bharatiya Janata Party (BJP), which was voted into power in May, in its manifesto opposed a policy put in place by the previous Congress party-led government opening up India to the entry of foreign supermarket chains.

The country’s retail industry suffered a significant setback with the French company Carrefour’s announcement this month that it would close its five cash-and-carry stores in India by the end of September. Carrefour did not explain its decision and its exit has led to speculation that the BJP’s opposition to overseas investment into supermarkets was a factor in the move.

This followed Walmart’s decision last October to dissolve its joint venture in India with Bharti Enterprises and suspend its plans to open supermarkets in the country. The American retailer, which has wholesale operations, cited India’s requirement for foreign chains to source 30 per cent of their products from local small and medium-sized enterprises. In April, however, it revealed its aim to open an additional 50 wholesale stores in India.

India in 2012 opened up the retail sector to supermarket chains – in “multi-brand” retail – allowing foreign direct investment (FDI) of up to 51 per cent. This decision sparked protests across the country from those concerned that the move would put small family-run shops, which are widespread across India, out of business.

With the economy recently slowing to decade-low levels, analysts argue that foreign investment in retail is much needed.

“India needs to build a vibrant retail sector with both single brand and multi-brand retail stores,” says Kamal Sen, the president and chief executive of Cogitaas, a consultancy which specialises in strategy and planning. “The arguments against FDI in multi-brand retail causing job losses are rather weak, because the government does allow multi-brand retail by Indian companies.”

Global retailers have been wary of taking up the opportunity, partly because of restrictions surrounding the policy, including the sourcing requirements and the fact that individual state governments can choose to deny them entry, as well as concerns that the new government could opt to reverse the reform completely.

The UK supermarket giant Tesco at the end of last year became the first to gain approval to move into India under the reform after it announced plans to invest US$110 million to set up a chain of shops in a joint venture with India’s Tata Group. The country permitted 100 per cent FDI in single-brand retail – stores that sell only their own brand of products – from the beginning of 2012, lifting a previous cap of 51 per cent.

“Multi-brand retail FDI and any other steps taken to strengthen this sector will have multiple benefits – job creation, developing real estate, supply chain investment, elimination of middlemen and what is very important at present, control of prices of groceries and other items through direct purchase and supply chain efficiencies,” says Mr Sen. “Full-scale liberalisation of this sector and heavy investment over the next few years will lead to growth, employment and help in inflation control.”

Global supermarkets would need much more clarity before risking investing in India, however.

“As far as multi-brand is concerned, I think it’ll be a wait and watch situation,” says Ankur Bisen, the senior vice president of retail at Technopak, an Indian consultancy. “Apart from Walmart and Tesco, I’m not sure anybody else would be looking at India in the current form of reforms. They would be expecting … more stability as far as reforms are concerned to start to look at India more seriously.”

He believes that the government is unlikely to go as far as actually reversing the policy on overseas investment into supermarkets.

Despite the challenges, India is too big a market for retailers to ignore.

With a burgeoning young population of more than 1.2 billion and growing spending power, India is still a relatively untapped market for global retailers and presents a huge opportunity. India’s retail industry is worth about $500bn and is expected to reach $1.3 trillion by 2020, according to PwC.

International chains including Marks & Spencer and Zara are expanding in the country. H&M, the Swedish clothing firm, became the first retailer to announce plans to take advantage of India relaxing regulations to allow 100 per cent FDI in single-brand retail and is aiming to open its first store in New Delhi later this year.

“Very few markets in the world offer you the size of retailing that excites global retailers,” says Mr Bisen. “Very few markets have a futuristic growth of at least 6 per cent over the next 10 years, in spite of uncertainty.”

Organised retail, or chain stores, make up only 7.5 per cent of the market in India, according to a recent report by EY and the Retailers Association of India. This is expected to rise to 10 per cent by 2018. But despite growing consumerism in India, retailers have faced operational challenges that include the convoluted supply chain.

“This growth in organised retail has been achieved at a significant cost. The wave of organised retail started more than a decade ago,” analysts wrote in the report. “However, most players have struggled to achieve the desired level of profitability and returns. Despite high investment of time and capital during this long gestation period, the return from the retail business continues to be a major concern.”

Reliance Retail, which is part of the Indian conglomerate Reliance Industries, is looking at shutting down more than 100 of its Reliance Fresh grocery stores in India because of concerns about profitability, the Times of India reported earlier this month.

There could be some relief on the way. This month’s federal budget unveiled measures that could help to boost the sector, including the allocation of 50bn rupees (Dh3.03bn) for the country’s warehousing sector and the announcement that a long-awaited goods and service tax would likely be rolled out this year. The move would streamline taxes for businesses and reduce their costs.

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