Wal-Mart & Co won’t have India supermarkets any time soon.
December 7: This morning, after opposition protests stopped parliament operating for two weeks, the government announced that the FDI plans are “suspended” till a “consensus” is reached by all political parties and state chief ministers. This surely means that it will not be introduced before the next general election – which is not due till 2014, but arguably should be much earlier, given the government’s appalling record.
See later blog post – Is India’s problem too much democracy or a Soviet-style prime minister? wp.me/pieST-1ve
Dec 1: I’ve never understood why India wants international supermarket chains like Wal-Mart (especially) and Tesco to trample across the country, supposedly providing consumers with a good deal while actually giving a far from good deal to employees and to farmers and other suppliers. But I guess one has to be relieved that the Indian government has at last come to a decision, after over 15 years of being pushed around by vested-interest opposition from existing retailers, traders and other distribution middle-men, plus leftist political parties, and relentless pressure to open up from the US and elsewhere.
Any idea that Wal-Mart will treat farmers enormously better than the often crooked and corrupt traders and middlemen that they have to deal with currently is far-fetched, as are government claims that the advent of foreign investment will rapidly create jobs and bring down prices, helping to curb India’s currently high rate of inflation.
Experience has shown that farmers have problems with the bulk buying and contract farming that Wal-Mart and others will want because they find it difficult to sell below-standard produce that is rejected by their primary buyers. Anand Sharma, the commerce minister, was last week quoted saying 10m jobs would be created over three years, which is frankly ludicrous (maybe he was misquoted!). It will take three years at least for FDI to make any real impact on jobs and prices and it could be far longer, given regulatory and other hurdles that companies would have to tackle.
The retail sector’s restrictions on foreign investment began in 1997, six years after the start of India’s general economic liberalisation. It currently remains one of the most controlled areas, along with defence manufacturing and insurance. The 1997 change allowed 100% FDI in cash and carry (wholesale) stores, thereby effectively banning it from the rest of the sector. Almost a decade later, in 2006, it was allowed up to 51% for single-brand retail shops such as upmarket luxury brands (which had already been working as franchises), and that also facilitated Marks & Spencer. Multi-brand retail however was blocked to prevent FDI in supermarkets that sell farm produce.
By the mid-2000s, India’s general consumer market was opening up and Indian businesses, led by Mukesh Ambani’s Reliance Industries (RIL) and by Kishore Biyani’s Future Group (Pantaloon stores), started developing supermarket chains and other retail outlets.
Fearing they were losing opportunities to enter India, foreign multi-brand supermarkets began to move in. Wal-Mart joined up with the Bharti group (which was diversifying from telecoms) and Tesco went with the Tata group, in both cases restricted to wholesale cash-and-carry stores that could provide Bharti and Tata shops with supplies.
But this was not enough for companies like Wal-Mart, Tesco – and Carrefour that has tiptoed into India (the opening of its second wholesale store – above - in Jaipur, was disrupted by demonstrations and a fire earlier this week). Such companies have continued to pressure the Indian government, backed by the US government and international agencies, and that led to last week’s decision to allow 51% FDI in multi-brand supermarkets and 100% in single-brand outlets.
So the question to be asked it why, if big Indian groups like Reliance, plus Wal-Mart and others from abroad, were expanding in what is known as the (wholesale) back-end, is it necessary to open the (retail) front-end up to FDI? The answer is that no Indian company has the will to tackle the politically-ridden areas of farming, produce trading and distribution – Reliance was driven out of some of its early attempts, and Bharti abandoned a farm-to-fork enterprise (which I wrote about in Fortune magazine over-optimistically in 2006).
It is the back end that urgently needs to be developed because India has few freezer-based chains and the other logistics needed to carry farm and other goods – over 40% of produce sent from farms to urban areas is wasted, which is appalling for a country that is the world’s second largest producer of fruit and vegetables. Reliance has done relatively little, as has multi-national Hindustan Unilever and other possible candidates.
Reluctant to invest
Wal-Mart and Tesco meanwhile have not wanted to commit heavy investment because they have not been able to invest in front-end retail shops, where the profits are, and because there have not been enough shops to justify a supply chain. The government hopes that the 51% FDI limit in retail and 100% in wholesale will give sufficient incentive for foreign companies to invest heavily, building the linkages that India undoubtedly needs, and maybe spurring Indian groups to do more.
In order to try to appease the opposition, the government is limiting the concessions to the 53 largest cities that have populations of over 1m. It will then be up to individual states to decide whether they want to allow the stores, and to draw up planning and other regulations restricting their operations. At least 30% of goods will also have to be sourced from Indian small firms (last week the announcement omitted the word “Indian”, which raised the spectre of supermarkets being swamped with cheap Chinese manufactured goods).
These safeguards look sufficient to limit the impact that the foreign firms might have, and they answer my original point of not knowing why India wants to let Wal-Mart trample across the country. India undoubtedly needs to smarten up its appalling logistics and farm-to-fork distribution, and tackle the mafia of middlemen and traders. Wal-Mart however has such an appalling international image that it is arouses instant opposition and makes it easy – and understandable – for those who want to block progress.
As I write, it remains to be seen whether prime minister Manmohan Singh will ride out this crisis and enforce the new policy, or whether he will be forced to shelve the plans by his Congress Party, led by Sonia Gandhi and her son Rahul Gandhi whose reputation hangs on the coming Uttar Pradesh state elections. Neither Gandhi has yet spoken in favour of the FDI.