Inside This Issue - News
India reform stalls
December 19th, 2011
NEW DELHI – In an embarrassing reversal that raises questions about India’s potential for economic development, the government of Prime Minister Manmohan Singh has suspended its plan to liberalize restrictions on foreign investment in the country’s retail sector, just two weeks after announcing the move.
On November 24 the government declared that foreign retailers would be allowed to own as much as 51% of retail enterprises selling multiple brands, while 100% foreign ownership of single-brand retailers would be allowed. Foreign-owned retailers would be allowed to open stores only in the 53 cities that have populations of 1 million or more, and they would be required to purchase at least 30% of the goods sold in their stores from small Indian industries. The minimum investment for such a venture would be $100 million, half of which would have to be allocated to infrastructure.
The news was greeted with cautious enthusiasm by some major global retailers that have footholds in the country. "This change will positively impact the Indian market and our people," said Raj Jain, president and managing director of Walmart India and chief executive officer of Bharti Walmart Ltd., Walmart’s joint venture with Bharti Enterprises. "However, 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."
Similarly, the managing director for India at Carrefour SA, Jean-Noel Bironneau, stated that the retailer was waiting for clarification of the rules.
However, before clarification could be issued, the government found itself engulfed in a mounting firestorm of protest, as opposition was voiced not only by the ruling Congress Party’s opponents but by two of its parliamentary allies as well. In addition, five leaders of Indian states announced their opposition to allowing foreign retailers to operate within their jurisdictions.
The intensity of the protest was symbolized by the vow of a leader of the main opposition Bharatiya Janata Party (BJP) to “personally set fire” to any Walmart store opening anywhere in the country. Small shopkeepers across the country closed their stores on December 1 in a daylong strike intended to intimidate the government into backing off its plan. The strike was supported by the right-of-center BJP and the Communist Party of India.
The liberalization measure can be implemented by executive decision and did not require parliamentary approval, and the Singh government initially defied opposition demands for repeal. Minister of Commerce Anand Sharma contended that the move would benefit India’s vast population of mostly poor consumers and its millions of farmers. In addition to creating millions of jobs, introducing the technological know-how and investment of foreign retailers would eliminate scarcity and lower prices, reining in inflation that exceeds 9%.
Even the country’s large domestic retailers, who could benefit by substantial investment from global players such as Walmart, Carrefour and Britain’s Tesco PLC, supported the move. Kishore Biyani, chief executive officer of Future Group, which owns Pantaloon Retail India Ltd., told the Associated Press that the policy would be a “win for consumers, a win for retailers, a win for suppliers and a win for farm producers. "Ninety percent of India should benefit," he said.
Nevertheless, on December 7 the Singh government buckled and announced that the decision would be suspended until a consensus could be reached. "The decision to bring 51% foreign direct investment in retail has been suspended until a consensus is brought among various stakeholders," said Finance Minister Pranab Mukherjee in a parliamentary address. "The policy will not be implemented without consultation with political parties and chief ministers of various states."
The government did not retract its decision to allow 100% ownership of single-brand retail companies such as Nike Inc.
Ironically, if the retreat was intended to bolster the government’s political position, it may have had the opposite effect by discrediting an administration that had already been weakened by multiple corruption scandals, slowing economic growth and spiralling inflation.
Some critics, particularly in the modern banking and finance sectors, denounced the reversal and predicted that the Singh administration, which faces a general election in 2014, will abandon any further efforts at reform.
The episode throws into doubt the near-term likelihood of foreign-led retail modernization, and it raises broader questions about India’s continued economic development.