India has just relaxed a further set of rules governing foreign investment in its retail sector. The world’s biggest retail chains, which were initially eager to do business in populous India, may still not be too excited. The potential size of the market ($850 billion by 2015, according to Deloitte) and the wallet power of younger Indians are enticing aspects but the country’s newly-relaxed yet still-complicated rules are not exactly a welcome mat.
Since opening up the retail sector to 51% foreign investment in 2012, India has not received a single application from global retailers. Despite the modified rules, here are reasons why they won’t be rushing to India anytime soon:
Wal-Mart store / Wikipedia
*The new rules say foreign multi-brand retailers will be allowed to set up shop in cities with less than 1 million population (earlier, stores could be located only in cities with over 1 million population). But foreign retailers will still need regional governments’ permission to open outlets. India has 29 states. Politicians in each of those 29 states will get to decide which cities the foreign retailers can operate in.
*Retailers are required to source 30% of their goods from small local enterprises. The government has given foreign multi-brand retailers five years to work up to this limit. Some foreign retailers such as those selling apparel could meet this condition while others, electronics retailers like Best Buy or Home Depot for instance, will not be able to.
*Foreign retailers are not allowed to do e-commerce. In today’s multi-channel retailing context, e-retailing is a critical component for global retailers.
*Global retailers will have to invest at least 50% of their initially mandated $100 million investment into back-end infrastructure such as cold chains and warehouses within three years. Many multinational retailers would balk at this. Consumer electronics retailers, for example, do not need complicated back-end infrastructure.
*With general elections due in 2014, there is a further air of uncertainty about policy.
India has been travelling a tortured path in liberalizing its retail sector. On the one hand, it needs foreign investment to boost its economy. On the other, the opening up of retail last year to foreign investors prompted widespread protests. In a country where unorganized retail thrives, large-format multinational retailers are seen as a threat to thousands of small mom-and-pop stores.
Retail experts say that the ‘new’ rules are still too restrictive and will not alter anything. “Not too many foreign retailers will be excited about the changes, they will not be beating a path to our door,” said Arvind Singhal of the retail consultancy, Technopak. “The changes are hogwash, scrap the policy and start afresh,” he recommended.
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