Foreign supermarket chains are making a beeline to India, sensing the immense growth opportunity of the country’s $500-billion retail sector.
After the government allowed 51 per cent FDI in multi-brand retail in September 2012, many global retailers have moved to make their presence felt in the Indian market. They firmly believe in India’s economic growth story, which has paved the way for a flourishing middle class with rising disposable income, says researcher WallStAnalyst.
Moreover, India is expected to witness steady economic growth over the next few years, far outpacing that of most major Asian economies. So, many foreign retailers are entering into joint venture agreements with established local players to gain a firm foothold in the Indian retail space. In a race to emerge as the top players, some foreign retailers have agreements to supply merchandise and provide technical know-how and support their Indian partners, it says.
While the government of India’s move to allow FDI in multi-brand retail raised cheers among foreign retailers, they were distraught with rules applying to mandatory investment in back-end infrastructure, compulsory 30 per cent local procurement and restrictions on setting up stores only in cities with a population of more than 100,000 people. Seeing no way out, many major foreign players severed their joint ventures with Indian players.
WallStAnalyst adds: “Sensing the exodus of other major foreign retailers, the government quickly relaxed some rules, thereby allowing global retailers to source 30 per cent of their products from SMEs only at the time of starting their business.”
Foreign chains were also given the green signal to set up stores in cities with a population of less than 10 lakh and invest lesser on back-end infrastructure as against the mandatory requirement of at least $100 million to set up shops in India, it said.
The government’s move to allow 100 per cent FDI in multi-brand retail has been strongly opposed by small traders and neighbourhood grocery stores who fear being wiped out. Adding fuel to this dispute, some political parties have turned the tussle into an election issue, vowing to overturn the rules.
In a major development, two state governments withdrew the permission granted by their predecessors to foreign retailers for setting up supermarket chains. It is expected that many other states will follow the lead, which could keep away foreign investors from establishing their presence in the country.
WallStAnalyst said that while the much-need FDI would augur well for the Indian economy, it remains to be seen what the government does to make the retail sector more investor-friendly for international bidders.
