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Foreign Direct Investment Status Impacting India Growth

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Endcap Logo.Foreign direct investment regulations for multi-channel retail, approved in 2012, have become a weapon for trading political blows in India’s current general election campaign.

The recent development suggests the Indian market is closing its doors to foreign retailers, but politicians could change their minds post-election if economic growth continues to drag.

One of the many vague conditions in the FDI rules was that final decisions on how the rules would be implemented would be made at the state level. Newly elected governments of any Indian state could simply withdraw official consent to FDI in retail, meaning any potential investor faced enormously high investment risk.

It happened in January when the new Delhi state government canceled consent granted by the former Congress-led state legislature. A few days later, the newly elected Bharatiya Janata Party in Rajasthan also came out against foreign direct investment.

In what appeared to be an attempt to offer clarification, Indian trade and commerce minister Anand Sharma declared that states were only given one opportunity to approve the FDI multi-brand retail policy and that this was not “a revolving door.”

New state governments could circumvent this ruling by restricting the presence of some retailers under the Shops and Establishments Act. This empowers the state government to regulate retailers by, for example, barring them from opening outlets in certain parts of a city.

Resistance to FDI in Delhi and Rajasthan means that, for the time being, only nine of India’s 28 states still back the policy. If we consider that foreign players like Tesco and Carrefour would prefer to build store networks in only the largest cities, then today they would likely be looking at a mere four states (Maharashtra, Haryana, Karnataka and Andhra Pradesh).

Low-key investment plans
Although Tesco, Carrefour, Auchan and Walmart have all shown varying degrees of interest in multi-format retailing in India, their investment plans remain low-key.

Tesco’s $110 million investment plan in Tata Group’s Trent Hypermarket division does not suggest any rapid expansion. Tesco will be studying shopper habits in different regions and testing different store concepts. By way of illustration, Tesco opened an 1,800-sq.-ft. Star Daily convenience store in Maharashtra last November.

Carrefour is reported to be once again in negotiations over possible capital investment in Future Group, although we could speculate that this story has been floated more in an attempt to appease shareholders as anything else.

Walmart, which among foreign retail chains in India has encountered the greatest local opposition due to a high-profile bribery investigation, terminated its partnership with Bharti Retail at the end of last year, froze its expansion of cash-and-carry stores and laid off more than 100 of its Indian staff. Despite this, Walmart has not altogether lost its interest in India, as it registered a new company called Wal-Mart India Pvt.

France’s Auchan has employed a different strategy, opening 13-15 hypermarkets annually based on a franchising model designed to bypass regional legislation. But its plans were rejected by the Indian Department of Industrial Policy and Promotion in 2013.

We do not expect any radical change in the development of India’s retail market as any opening up to foreign players will likely occur only slowly, most probably state by state. Tesco, Walmart and Carrefour are unlikely to pump funds into India until FDI rules are clearly set in stone, which will not happen before the next Assembly elections in April/May. Carrefour, however, could follow Tesco’s initial strategy of a limited partnership with a local player like Future Group.