Early last week, India’s government looked set to change its retail laws, freeing up restrictions on foreign direct investment (see Let Walmart In, Wholesale Reform, Fury erupts as India opens door to Wal-Marts, IKEA set to announce retail plans for India). Foreign retailers that sell multiple brands (Walmart, Tesco, Carrefour, etc.) will now be allowed to own 51% of retail operations in India; single brand retailers (Ikea, Nike, Apple, etc.) will be allowed to own 100% of retail operations.
India’s hope? The hope is that foreign entry can help modernize infrastructure, distribution, and supply chains, and ultimately, reduce prices paid by end consumers. In this way, India views foreign investment as a way to stimulate the local economy.
For some foreign companies, this legal change is the green light they’ve been waiting for. IKEA, for example, which previously refused to enter the market, is now in India considering a retail foray. However, the change in law comes with a catch:
Foreign retailers will be obliged to invest $100m over five years. And at least half has to be spent to develop rural infrastructure and to establish a cold-chain system. Firms will also have to commit to sourcing 30% of their wares from small and medium-sized suppliers. Finally, foreign retailers will only be allowed to set up shop in cities with a population of over a million.
Political and public reaction has been split. Parliament and the opposition BJP (Bharatiya Janata Party) are outraged, some even going so far as threatening to burn down foreign-owned stores opened in the country.
…half of India’s states say they will refuse to implement the reform…Trade unions have promised strikes. Parliament has been shouted to a standstill. Already there is talk that the government might back down.
Many small business owners fear the effects of foreign entry.
Experts predict that stepped-up competition will sharply reduce the number of small retailers — the nation’s second-largest employer after farming, with 35 million workers.
I am generally pro-trade, in favor of open economic exchange. So I believe that this would be a welcome change. Nevertheless, it will be interesting to watch how things play out politically.
There was word last week that, in the face of significant domestic pressure, the Indian government was actually reconsidering its decision. However, even if the Indian government decides to go ahead with the proposed law change, I’m not so sure that it will bring about a flood of foreign entry.
India, with its underdeveloped political and economic institutions, remains an exceptionally difficult place for foreign firms to conduct business, …even with the legal change. Moreover, the mandates built into the legislation (minimum $100m investment, mandated infrastructure development, etc.) are particularly onerous. It will make entry more costly, and potentially, unattractive. So although the law makes it theoretically more feasible for multinational retailers to conduct business in India, in practice, I’m not convinced it will have a great effect.
UPDATE: Bowing to public pressure, the Indian government decided to hold off on implementing the controversial retail law (allowing multibrand retailers to own 51% of their operations in India) until a broader consensus can be reached (see India retail reform unravels after backlash). It is interesting to note that the government has only suspended one of the two retail law changes; single brand retailers will still be able to own 100% of their retail operations.
Although I did not anticipate that the multibrand retail law change (had it taken effect) would result in mass foreign entry, I generally view any step closer to free trade and lower foreign entry barriers as a step in the right direction. For this reason, I think the Indian government is bowing to pressure from a powerful minority that runs counter to the greater national good.