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MUMBAIIndia paved the way for international supermarkets and department stores to establish joint ventures, a major step in opening one of the last great consumer markets that has been off-limits to many of the world's biggest retailers.
Shoppers browse the shelves inside a store in New Delhi on Thursday.
The cabinet of the Congress party-led coalition in New Delhi agreed Thursday to allow foreign multibrand retailers to own up to 51% of joint ventures in India, according to a government official. Previously, retailers such as Wal-Mart Stores Inc. of the U.S. were permitted to establish only wholesale joint ventures. Now, they will be able, with an Indian partner, to open supermarkets.
The government also changed the rules to allow single-brand retailers such as Nike Inc. to own 100% of their Indian businesses. Before, they were permitted to own only 51% of a partnership with an Indian company.
The move is expected to spur a retail rush to the world's largest democracy and has the potential to transform not only the retailing landscape but also the nation's ailing infrastructure. Currently, retailing is dominated by millions of mom-and-pop stores, and it lacks much modern supply-chain management, including cold storage. As a result, in a nation where malnutrition remains a serious problem, food waste is rife.
More broadly, the move signals that the Indian government, after years of prevaricating over allowing greater foreign investment in several sectors, is now serious about attracting overseas funds.
Two decades ago, India revamped its economy to make it more market oriented and open compared with the Soviet-style central planning it had practiced for decades. That led to great enthusiasm among multinationals over the promise of India's 1.2-billion consumers. But the government in the past year has been hit by a series of corruption scandals, and it has been widely criticized by opposition parties and business for not introducing a second wave of changes that would re-ignite flagging foreign interest.
Indeed, overall foreign direct investment dropped 28% to $29.4 billion in the year ended March 31 as India's economic forecast clouded. Gross domestic product growth is now estimated at around 7.5% this year, down from predictions of 9% earlier this year, and the Indian rupee has recently weakened to record lows against the dollar. Further opening the retail marketand the message that sends about the government's willingness to introduce reformsmight help kick-start the economy and shore up faltering investor sentiment.
Details of the new rules weren't available Thursday evening. They are expected to be announced formally by the government in Parliament Friday. The new opening may come with conditions: Recent government proposals had suggested that foreign investors may have to invest at least $100 million to set up multibrand retail operations, and that at least $50 million of that must be invested in back-end operations such as food-processing units and warehouses, as well as a supply chain, among other things. There could also be restrictions on where retailers can set up shopfor instance, limiting their presence to cities with a population of more than one million people.
None of that would represent a significant hurdle, said Saloni Nangia, senior vice president at Technopak Advisors Pvt. Ltd., a New Delhi-based consulting firm. Technopak estimates the Indian retail market is currently generating sales of about $470 billion a year, of which a miniscule $27 billion comes from "organized retail"chain stores with centralized operations and shops in malls, for instance. Over the next five years, retail sales are expected to reach $675 billion, of which about $85 billion will come from organized retail.
Wal-Mart is expected to be one of the first to make a move. Raj Jain, chief executive of Bharti Walmart Pvt. Ltd., Wal-Mart's wholesale partnership in India, said he welcomes the government's moves. "Wal-Mart has been in India for over three years now, and we can use the same supply chain that we have set up to expand our business here," he said. Mr. Jain said India can expect to see some stores with Wal-Mart signs on them. "That's what we've been working for all this time," he said.
Tesco PLC, which already has a franchise agreement with Tata Group's Star Bazaar stores, welcomed the news. "Allowing foreign investment in retail would be good news for Indian consumers and businesses, and we await further details on any conditions," a Tesco spokesman said.
The idea of opening up the domestic retail market to foreign retailers has been hotly contested over the past several years. A key concern has been that Western companies would cannibalize mom-and-pop stores. Ms. Nangia said those fears are overblown because "consumption and demand are growing at a much faster pace than either organized or unorganized can keep pace with."
Divya Jayanthi, an assistant sales manager at Hunter Douglas, which makes window treatments, says she still uses her local store for daily needs but goes to a big- box retailerHyperCITY Retail (India) Ltd.near her home in Navi Mumbai to stock up on cookies and confectionary. "Stores like Wal-Mart will have better quality products, and that will force the local guys to improve their goods as well," she says.
A spokeswoman for Germany's Metro Group AG, a major supermarket company, said it "welcomes reforms opening the Indian market to international retail companies as we always stated that we welcome liberalized and free markets as these are preconditions for economic growth." Metro Group currently has no plans to introduce stores in India, she said.
Not everyone is thrilled. Dharmendra Kumar, director of India FDI Watch, which has been working with trade associations, hawkers organizations and farmers groups to lobby against the policy change, says there are a few key elements missing from the new rules.
"There has been no talk on the size, location or number of stores that these companies will be allowed to operate," he said. "The other problem is who is going to enforce these conditions on the retailers? There is no monitoring mechanism."
Thomas Verghese, head of the Confederation of Indian Industry's retail committee, says international retailers, faced with extremely low growth rates in their home countries, will look at India as a great opportunity. For Indian retailers, foreign investment could bring welcome cash that they can use to expand.
Kishore Biyani, founder and group chief executive of India's largest retailer, the Future Group, said in a recent interview: "Access to capital will be a big game changer for us. It will allow us to be more fearless and grow quickly."
India Eases Foreign Direct Investment Rules - WSJ.com
Shoppers browse the shelves inside a store in New Delhi on Thursday.
The cabinet of the Congress party-led coalition in New Delhi agreed Thursday to allow foreign multibrand retailers to own up to 51% of joint ventures in India, according to a government official. Previously, retailers such as Wal-Mart Stores Inc. of the U.S. were permitted to establish only wholesale joint ventures. Now, they will be able, with an Indian partner, to open supermarkets.
The government also changed the rules to allow single-brand retailers such as Nike Inc. to own 100% of their Indian businesses. Before, they were permitted to own only 51% of a partnership with an Indian company.
The move is expected to spur a retail rush to the world's largest democracy and has the potential to transform not only the retailing landscape but also the nation's ailing infrastructure. Currently, retailing is dominated by millions of mom-and-pop stores, and it lacks much modern supply-chain management, including cold storage. As a result, in a nation where malnutrition remains a serious problem, food waste is rife.
More broadly, the move signals that the Indian government, after years of prevaricating over allowing greater foreign investment in several sectors, is now serious about attracting overseas funds.
Two decades ago, India revamped its economy to make it more market oriented and open compared with the Soviet-style central planning it had practiced for decades. That led to great enthusiasm among multinationals over the promise of India's 1.2-billion consumers. But the government in the past year has been hit by a series of corruption scandals, and it has been widely criticized by opposition parties and business for not introducing a second wave of changes that would re-ignite flagging foreign interest.
Indeed, overall foreign direct investment dropped 28% to $29.4 billion in the year ended March 31 as India's economic forecast clouded. Gross domestic product growth is now estimated at around 7.5% this year, down from predictions of 9% earlier this year, and the Indian rupee has recently weakened to record lows against the dollar. Further opening the retail marketand the message that sends about the government's willingness to introduce reformsmight help kick-start the economy and shore up faltering investor sentiment.
Details of the new rules weren't available Thursday evening. They are expected to be announced formally by the government in Parliament Friday. The new opening may come with conditions: Recent government proposals had suggested that foreign investors may have to invest at least $100 million to set up multibrand retail operations, and that at least $50 million of that must be invested in back-end operations such as food-processing units and warehouses, as well as a supply chain, among other things. There could also be restrictions on where retailers can set up shopfor instance, limiting their presence to cities with a population of more than one million people.
None of that would represent a significant hurdle, said Saloni Nangia, senior vice president at Technopak Advisors Pvt. Ltd., a New Delhi-based consulting firm. Technopak estimates the Indian retail market is currently generating sales of about $470 billion a year, of which a miniscule $27 billion comes from "organized retail"chain stores with centralized operations and shops in malls, for instance. Over the next five years, retail sales are expected to reach $675 billion, of which about $85 billion will come from organized retail.
Wal-Mart is expected to be one of the first to make a move. Raj Jain, chief executive of Bharti Walmart Pvt. Ltd., Wal-Mart's wholesale partnership in India, said he welcomes the government's moves. "Wal-Mart has been in India for over three years now, and we can use the same supply chain that we have set up to expand our business here," he said. Mr. Jain said India can expect to see some stores with Wal-Mart signs on them. "That's what we've been working for all this time," he said.
Tesco PLC, which already has a franchise agreement with Tata Group's Star Bazaar stores, welcomed the news. "Allowing foreign investment in retail would be good news for Indian consumers and businesses, and we await further details on any conditions," a Tesco spokesman said.
The idea of opening up the domestic retail market to foreign retailers has been hotly contested over the past several years. A key concern has been that Western companies would cannibalize mom-and-pop stores. Ms. Nangia said those fears are overblown because "consumption and demand are growing at a much faster pace than either organized or unorganized can keep pace with."
Divya Jayanthi, an assistant sales manager at Hunter Douglas, which makes window treatments, says she still uses her local store for daily needs but goes to a big- box retailerHyperCITY Retail (India) Ltd.near her home in Navi Mumbai to stock up on cookies and confectionary. "Stores like Wal-Mart will have better quality products, and that will force the local guys to improve their goods as well," she says.
A spokeswoman for Germany's Metro Group AG, a major supermarket company, said it "welcomes reforms opening the Indian market to international retail companies as we always stated that we welcome liberalized and free markets as these are preconditions for economic growth." Metro Group currently has no plans to introduce stores in India, she said.
Not everyone is thrilled. Dharmendra Kumar, director of India FDI Watch, which has been working with trade associations, hawkers organizations and farmers groups to lobby against the policy change, says there are a few key elements missing from the new rules.
"There has been no talk on the size, location or number of stores that these companies will be allowed to operate," he said. "The other problem is who is going to enforce these conditions on the retailers? There is no monitoring mechanism."
Thomas Verghese, head of the Confederation of Indian Industry's retail committee, says international retailers, faced with extremely low growth rates in their home countries, will look at India as a great opportunity. For Indian retailers, foreign investment could bring welcome cash that they can use to expand.
Kishore Biyani, founder and group chief executive of India's largest retailer, the Future Group, said in a recent interview: "Access to capital will be a big game changer for us. It will allow us to be more fearless and grow quickly."
India Eases Foreign Direct Investment Rules - WSJ.com
