India Reforms Suffer With Wal-Mart’s Retreat

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India Reforms Suffer With Wal-Mart's Retreat - Businessweek

It was the change that was supposed to demonstrate India’s government was serious about reform after years of missteps: Defying critics in their own coalition as well as the opposition party, Prime Minister Manmohan Singh and his new economic team, led by well-respected Finance Minister Palaniappan Chidambaram, in August successfully opened the country’s retail market to foreign companies including Wal-Mart Stores (WMT) and Tesco (TSCO:LN).

Instead, the policy has turned into the latest embarrassment for the beleaguered government struggling to revive a stalled economy. Despite the ballyhooed opening of the market, no major foreign retailer has made a move to take advantage of the liberalized rules. Indeed, the movement now is in the other direction: Wal-Mart is parting ways with the Indian company that was supposed to help the American giant penetrate India. Wal-Mart is discontinuing its five-year-old franchise agreement with Bharti Enterprises, the Indian conglomerate that operates 200 superstores, the two companies said in a statement issued yesterday. Wal-Mart will also buy out Bharti’s stake in the companies’ 20 wholesale outlets in the country.

Since the Indian government requires foreign companies like Wal-Mart to have local partners, splitting with Bharti effectively means Wal-Mart won’t be opening stores in India for the foreseeable future. With Wal-Mart’s move, foreign investment in retail “is pretty much stuck now,” Dhvani Bavishi, an analyst at ICICI Direct, told Bloomberg News.

In a discouraging sign for Singh and Chidambaram’s efforts to persuade foreigners that India is serious about liberalization, retail reform has fallen flat because foreigners say too many restrictions remain. For instance, Wal-Mart’s Scott Price, head of Asia operations, in an interview with Bloomberg Television a few days before the Bharti announcement, criticized a rule requiring foreign retailers to rely on local small and midsize enterprises (SMEs) for 30 percent of their sourcing. “Wal-Mart absolutely supports SMEs, but we need to sell what our customers want to buy,” he told Bloomberg TV reporter Susan Li. “What we are looking for is a level playing field with domestic retailers.”

Wal-Mart has other reasons to backtrack from India, where regulators have been investigating alleged violations of foreign investment rules, but the American company’s snub comes at a particularly bad time for Singh and his economic team. Growth has tumbled from almost 10 percent a few years ago, with the International Monetary Fund yesterday lowering its forecast for a GDP increase of just 3.8 percent. That would be a great number in the U.S. and other developed economies but is dismal for an emerging market like India, which is supposed to be a hotbed of growth. The government’s official forecast is 5 percent to 5.5 percent growth for the fiscal year ending in March.

The news isn’t all bad. India’s trade deficit shrank in September, the third month in a row of rising exports, to $6.76 billion. That’s the smallest deficit in two and a half years, and Chakravarthy Rangarajan, former governor of the Reserve Bank of India and current chairman of the Economic Advisory Council, says the current-account deficit could fall to $60 billion, or 3 percent of GDP, 14 percent better than the government’s official target and far below the record 4.8 percent for the fiscal year ended in March 2013. The rupee, in free fall for much of the summer, has rebounded more than 10 percent since late August. And Raghuram Rajan, the new central bank governor, has been easing emergency measures designed to protect the currency.

What seems to be good news, however, is also an indication of how weak the economy is. Much of the improvement in the trade deficit is the result of a sharp fall in imports as the economy weakens, rather than a surge in exports which can help rev up growth, wrote HSBC’s (HBC) Leif Eskesen, chief economist for India, in a note published today. Further improvement in the trade deficit will come thanks to “soft domestic demand and the depreciation of the currency,” he wrote. And while the currency has benefited in part because of Rajan’s policies, investors have also calmed down about fears of a Fed tapering hurting India and other emerging markets.Those worries could flare up again soon.

And then there’s the mess in Washington. Turmoil related to a possible U.S. default could leave India—with its large current-account deficit—particularly exposed.