The Indian government yesterday (24 November) voted to allow foreign companies to own a controlling interest in multi-brand retail outlets.
Reuters reported the move was the country’s biggest reform in years and should provide greatly needed investment in Asia’s third largest economy.
The ruling will allow for 51 per cent Foreign Direct Investment in multi-brand retail and raises the investment cap on single-brand retail to 100 per cent, up from 51 per cent. India currently allows 100 per cent FDI in wholesale operations.
At present independent ‘mom and pop’ style businesses account for as much as 95 per cent of sales in the multi-brand retail sector, so provided foreign retailers invest heavily in the sector, the government’s announcement looks set to transform the country’s retail landscape.
While local retailers have operated supermarkets in the country for years they have been beset by a lack of funding, expertise, and poor infrastructure, Reuters reported. This means effective cold chain transportation is almost non-existent there and bottlenecks are a constant problem.
Logistics problems have long led to fresh produce spoilage, which government figures put at 40 per cent. This increases the end cost of produce to consumers.
Local media has reported regulations will likely be included in legislation to ensure foreign companies source locally and invest heavily in back-end infrastructure.
Retail heavyweights such as Walmart, Carrefour and Tesco have long lobbied for restrictions to be eased and see huge opportunity for growth in India.
“Foreign retailers must be licking their lips at this opportunity,” said Narayanan Ramaswamy, executive director at KPMG India, which advises retail companies. “It has to be one of the biggest opportunities in the world right now.”
Reuters quoted Moody’s senior retail analyst Charles O’Shea as saying with a population of 1.2bn India is a place where the big players, such as Walmart, need to be.
The move has been vehemently opposed by many in the country and there are concerns its impact on independent retailers could heighten anger towards the ruling party ahead of state polls next year that will set the tone for general election in 2014.
Reuters reported slowing growth in the economy, a poorly valued currency, and high inflation might have spurred the government to ease restriction on FDI.
'Manmohan Singh, after all the scams and the impression of government paralysis, has realized it's time to take some bold steps. This is a very bold step that will please the middle class,' said political analyst Amulya Ganguli.
