Turbulent Times for Retail Trade in India

March 12, 2014 Posted by India Briefing Reading Time: 4 minutes

It has been an eventful two weeks for retail trade in India. With two months left until the elections, experts predict investors will await the results before making any major decisions. Last week, however, a number of big players were caught silently pressing ahead with their retail plans in India.

By Wiebke Szymczak

At a trade conference held in February, the BJP party’s ministerial candidate Narendra Modi, who is likely to win the upcoming elections in May according to polls, said small retailers must learn to work with large foreign stores and online companies. What appeared to be signaling a shift in retail policy, should Modi win, might have been a hint towards the opening of India’s first exclusive wholesale online retailer and the silent forays of the world’s largest retailer Wal-Mart. Throughout his election campaign, Modi had been building up a reputation for being business friendly, raising investors’ hopes that a BJP-led government would finally improve the investment environment.

Retail policy is a delicate topic in India, however. Afraid Modi’s statement would unfold in a storm of speculation, senior party leader Arun Jaitley jumped to qualify the statement of his fellow party member just a few days after the conference, trying to ward off rumors about a key electoral issue. “As far as FDI in retail is concerned, the Bharatiya Janata Party has genuine concerns against this and I don’t think, it is quite likely, that policy is going to be changed,” Jaitley told a TV channel in an interview. He did express his discontent with existing regulations, however, noting that “no policy is a policy for 100 years.”

Currently, the Indian retail sector is one of the most regulated in developing Asia. Some of the regulations, like industry specific investment caps, have been relaxed or abandoned recently, but the current government‘s amendments left the economy with new challenges rather than simplifying business activities. During the interview, Jaitley emphasized his belief that the tax reforms of the UPA government, which his party is aiming to inherit in the upcoming elections, were “one of the most important factors” that “soured” the investment environment in Indian retail.

With regard to retail trade, the UPA government is indeed in need of some good news. The ongoing tax dispute with Vodafone Group Plc is far from being solved, and just recently the electronics giant Apple was turned down seeking an exception from policy restrictions on FDI in retail. Apple is struggling with its India business due to problems in after sales service. Although the UPA government has recently allowed full investment in single-brand retail trading, Apple must rely on a network of licensed distributors instead of setting up their own branded stores as a clause in the policy requires foreign businesses to source 30 percent of their products’ contents from Indian small and midsize enterprises. Apple claims, however, that it cannot adhere to this clause because of its using minimal hardware for its products.

While single-brand retail remains stunted, developments in the multi-brand retail sector are seething, promising a great unravelling as the elections approach. Just after ShopClues announced the opening of India’s first wholesale online retail store, the Economic Times reported that Wal-Mart was planning to expand in e-retailing in India, planning a marketplace model akin to Amazon and eBay. “The project has been on for seven to eight months and has gathered pace in the past four to five months,” said a person with direct knowledge of the situation, who requested not to be identified. Wal-Mart India declined to confirm whether it was planning to deploy an internet-based retailing business in the country. “Our experiences worldwide support the fact that ecommerce is an important and growing area that meets our customers’ shopping needs. Toward this, we encourage the government of India to consider opening ecommerce for FDI,” a Walmart India spokesperson said in an e-mail statement.

More fuel was added to speculations just a few days later. According to the Economic Times, Bharti Group, which runs India’s largest mobile operator by both revenue and subscribers, is in talks with two global retail chains — French major Carrefour and Japan’s largest retailer Aeon — with the intention of forming a new joint venture with one of them. “Discussions with Carrefour were at an advanced stage. However, the talks were put on hold due to the entry of Japanese retailer Aeon,” said a source familiar with the negotiations.

As several polls indicate that a new government, headed by BJP candidate Narendra Modi, will be in place after the elections, it appears that retailers are silently getting ready for a change in FDI policy, ensuring they are prepared when India’s retail pie is divided.

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