India to open to foreign retailers
25 November 2011 10:03
India's cabinet has decided to allow more direct foreign investment in the nation's huge retail industry, a move that could strengthen the country's food supply chain and open India to giant global retailers such as Wal-Mart and Tesco.
The cabinet approved 51% foreign direct investment (FDI) in multi-brand retail and increased the FDI cap in single-brand retail to 100% despite resistance from both allies and opposition parties.
India currently allows 51% foreign investment in single-brand retailers and 100% for wholesale operations.
Top retailers such as Wal-Mart, Carrefour, Tesco and IKEA have long lobbied to free the policy further. Foreign multi-brand retailers have Indian partners in wholesale operations now but have no retail presence in the country of 1.2 billion people.
The spokesman for the ruling Congress party, Abhishek Manu Singhvi, called the decision "centrist and reasonable". He was speaking to the NDTV news channel.
The main opposition, the right-wing Bharatiya Janata Party, criticised the move.
"The government has clearly bowed to international pressure," spokesman Chandan Mitra told the same TV channel.
Asda owner Wal-Mart, British-based Tesco and French-based retailer Carrefour welcomed the decision.
"We believe that allowing 51% FDI in multi-brand retail is a first important step," Raj Jain, president of Wal-mart India, said. "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."
"Allowing foreign direct investment in retail would be good news for Indian consumers and businesses, and we await further details on any conditions," Tesco said.
Tesco currently has a franchise arrangement with Tata Group's Star Bazaar hypermarket chain, supplying merchandise to outlets in India.
Carrefour opened a New Delhi store last year and would not say what expansion plans might lie ahead.
"This legal evolution should contribute to modernise the Indian food supply chain and to fight against food inflation for the benefit of Indian customers," its statement said. It added the decision would help India's farmers and the nation's general economic development.
Ashish Sanyal, managing director of AMP Retail Services Pvt Ltd, said: "It's a good decision that will benefit everyone." He is a consultant who helps retailers enter India.
India's £258 billion retail market is the nation's second-largest employer, after agriculture, according to consulting firm Deloitte.
Advocates see the move as a way to strengthen India's almost absent food supply chain - which is so beset by spoilage, poor infrastructure, hoarding and middlemen that the government estimates some 30% of produce rots in a nation with soaring food costs and tens of millions who go to bed hungry each night.
If companies such as Wal-Mart and Tesco are allowed to open shops of their own, they may invest billions in improving farming techniques and getting produce into stores more efficiently, bringing down food inflation - which has averaged 10.5% over the last year - and possibly improving rural incomes.
The Ministry of Commerce says it will cost 76.9 billion rupees (£1 billion) to build the additional 35 million metric tons of food storage India needs.
In a July paper, it suggested that loosening restrictions on foreign investment in India's retail sector could be the best way to get more storage space built.
Yet the country has struggled to find consensus because of concerns about what it would mean for millions of small shopkeepers as well as the poor.
Mr Sanyal said small businesses had nothing to fear.
"At the end of the day this is like the high tide. All boats will rise. We will learn from the big retailers."
Political deadlock on long-promised reforms like this has helped cool foreign investor interest in India. Policymakers are under acute pressure to find ways to attract foreign currency to help strengthen the rupee, which hit an all-time low against the dollar this week.
Traders say the central bank has been buying rupees in recent days but those measures are unlikely to reverse the currency's plunge in the absence of more far-sighted policy reform.
In July, this year a government committee studying multi-brand retail had cleared the idea and suggested 100 million dollars (£64 million) as minimum investment for foreign companies.
The discussions on opening up India's retail sector have been going on for 10 years.
"There is a limit to how much time we can spend on a decision," Mr Singhvi said.
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