India cautiously alters retail investment laws

By Anita Awbi

- Last updated on GMT

Related tags: Retailing

The Indian government has relaxed outdated foreign direct
investment (FDI) laws to grant limited entry to overseas companies,
but has failed to please domestic policy makers or global
supermarket chains.

Last week the law that governs the percentage foreign investors can hold in Indian companies was changed in an attempt to modernise archaic 1950s retail legislation.

Until now, foreign food retailers were forbidden to enter the market, in a bid to protect local businesses and fledgling domestic supermarket chains.

But the government is slowing changing its stance, echoing the moves of the Chinese government over the past couple of years in relaxing FDI laws.

In India, single-brand foreign retailers can now own a controlling share of a business - up to 51 per cent - provided they gain government approval and sell only their own goods.

This is great news for UK-based Marks and Spencers, specialising in private label products, and food service companies such as McDonalds and Pizza Hut that until now were forced to operate a franchise system.

But for big-name supermarket chains, the new legislation failed to hit the mark.

They will have to wait for further reforms allowing non-Indian firms to take a controlling portion of retail outlets before they can enter the £119 billion sector, estimated to be the world's eighth biggest.

A government spokesperson told The Times newspaper yesterday: "This partial opening-up is to allow the government to see what impact some of these stores have. Once that process gets going we can look at opening up retailing in a bigger way."

In the meantime international retail giants can only operate wholesale outfits - despite recent pressure by Tesco and Wal-Mart bosses to influence policy.

And although last week's legislative changes brought improvements to the FDI ration in wholesale, foreign retailers are still restricted from building supermarket networks.

Instead they can now own 100 per cent of their Indian wholesale operations, without seeking governmental approval.

This has been seen as a major breakthrough for foreign investors keen to have a presence in the country, albeit through the backdoor.

PricewaterhouseCoopers (PwC) India analyst Asitava Sen told​: "Now the revision to the law allows 100 per cent cash and carry FDI, it makes sense for multinational retailers to get in that way. It would be more appropriate.

"They can learn about the local market, set up logistics and distribution centres, and generally prepare for another possible change in retail law."

To many, this first phase of legislative relaxation marks an economic trend towards a liberalised retail sector, despite the attempts of some in government to keep multinationals out and protect the domestic 'mom and pop' store phenomena.

These fragile local stores, tailor-made to suit the community they serve, currently make up 97 per cent of the food retail sector, and are strongly supported by India's main opposition party, the BJP.

But analysts predict this is all about to change. PwC states that the organised retail sector, comprised of regional or national chains, is set to grow to 10 per cent by 2010, representing a huge opportunity for prospective players.

And Indian oil company Reliance Industries announced last week plans to spend $750 million to set up supermarket chains, to tap what may become the world's fifth largest consumer market by the end of the decade.

Related topics: Market Trends

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