By  on November 9, 2010

NEW DELHI — President Obama has India’s burgeoning retail sector in his sights.

Obama, here on a visit to talk up economic cooperation and trade between the two countries, has joined the chorus of those pressuring the Indian government to loosen rules on foreign direct investment in retailing. Currently India restricts overseas firms to 51 percent ownership of single brand stores, meaning they need a local partner. Foreign companies can own 100 percent of cash-and-carry stores, but these can sell only to other retailers and businesses, not to the general public. Multibrand retailing is forbidden in India — which blocks the likes of Wal-Mart, Carrefour and Tesco from entering the market.

The rules are seen as protecting India’s thousands and thousands of small independent shopkeepers.

Addressing business leaders, the commerce minister of India, Anand Sharma, and planning commission deputy chairman Montek Singh Ahluwalia in Mumbai over the weekend, Obama said, “Here in India, many see the arrival of American companies and products as threats to small shopkeepers and to India’s ancient and proud culture. But these old stereotypes, these old concerns ignore today’s reality.”

Given the potential of the market, global brands are eager to see the removal of any barriers to their entering India. The Indian retail market ranks as the fifth largest retail destination in the world, according to the India Retail Report, and is expected to quadruple in size by 2025. Estimated at $511 billion in 2008, the retail sector is forecast to grow to $833 billion by 2013 and $1.3 trillion by 2018. And yet only about 5 percent of the Indian retail market is in the organized segment.

Just weeks before Obama’s visit, Wal-Mart chief executive officer Mike Duke spoke about FDI in New Delhi. “Our desire is to certainly see a 100 percent opening up of FDI in the retail sector,” he told reporters. “We’re in India because of the size of the population as well as the aspiring middle class that is willing to spend.”

The company has a 50-50 joint venture with the Bharti group and runs cash-and-carry outlets in the country to supply its stores. Multibrand retailers like Wal-Mart are only allowed to open wholesale outlets and provide back-end support to local operators.

“We have a great partnership with Bharti and will continue to expand on the same,” Duke said, adding that an opening up to FDI would help increase Wal-Mart’s sourcing of products from India by developing more vendors here. It would also provide great support to the Indian farmer and create up to 3 million jobs over the next five years and train more than 40,000 students. The company has been investing in training centers opened in Punjab and Delhi and will open another one in Bangalore shortly.

Bharti Wal-Mart has four cash-and-carry outlets in India and will add one more before the end of the year.

Others are also pressing for the FDI rules to be changed. The Planning Commission recently came out in favor of FDI in multibrand retail.

“Economic reforms in India have occurred by a series of steps,” said deputy chairman Ahluwalia. “This was a pending issue, and some years ago the government decided to allow foreign direct investment in what is called single brand retail. This is actually the luxury end of the spectrum. Next step was what about multibrand retail, which is the non-luxury end of the spectrum. The overall assessment is that in a fast-growing economy, there is going to be a lot of growth in the retail sector. So the scope for the traditional retail format to expand will be very significant. The report took into account the experience of China, where both modern retail and smaller trade has grown.”

Even though India is only the 14th largest trading partner for the U.S., the mutual benefits of opening up FDI in retail are obvious. Although the U.S. economy continues to struggle, India needs more training and better infrastructure to boost its retail segment. As Duke pointed out to the Indian government, more organized retail will bring in operational efficiencies and effectiveness in the supply chain and technological know-how, a point backed by local retailers and retail consultants.

“Retailers need funds and expertise to spruce up their back-end supply chain and other related operations. These investments have a long gestation period before they can have a positive impact on a retailer’s profits,” observed Arvind Singhal, chairman, KSA Technopak.

Dr. A.K. Pradeep — who joined Obama, the ceo’s of General Electric and PepsiCo, and other senior U.S. and Indian business and government leaders in Mumbai — is ceo and founder of the neuromarketing research firm Neurofocus. He detailed the issue: “Indian retail is a huge focus — and the fact that I’m part of this mission shows that it is not just about exporting retail from the United States to India, but understanding the human mind and consumer through neuroscience. It is not about doing retail American style, but rather in Indian style. It is part of how the American business community is going to be approaching India, using cutting-edge tools and technology.”

As Obama pointed out, global cooperation could change a lot. “Going forward, commitment must be matched by steady reduction to barriers in trade and foreign investment from agriculture to infrastructure and from retail to telecommunications,” he said.

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