India Staying the Course on FDI

Prime Minister Manmohan Singh indicated he has no plans to back away from plans to allow overseas companies to own 51 percent of multibrand retailers.

NEW DELHI — Prime Minister Manmohan Singh said Friday that overseas investment in retail is key to India’s overall progress.

This story first appeared in the September 24, 2012 issue of WWD.  Subscribe Today.

In his first televised address in two-and-a-half years, Singh indicated he has no plans to back away from his government’s plans to allow overseas companies to own 51 percent of multibrand retailers.

His resolve was shown by the fact that the government on Thursday issued a notification allowing foreign direct investment in multibrand retailing in all products, with the Department of Industrial Policy and Promotion saying the decision will take immediate effect.

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The speed with which foreign retailers such as Wal-Mart, Carrefour, Tesco and Ikea move into India remains unclear, however, both because of the ongoing political turmoil in the country and some of the regulations that are part of the new FDI policy.

On Friday, Trinamool Congress leader Mamata Banerjee, a partner in the ruling United Party Alliance, went through with her threat to withdraw her support for the government if it insisted upon approving the new FDI rules as well as an increase in the price of diesel fuel and a cap on the number of liquid propane cylinders available for home use. Banerjee and six TMC ministers handed in their resignations to the prime minister.

Whether the TMC’s withdrawal from the ruling coalition will result in its collapse remains to be seen. The UPA continues to have the support of the Samajwadi Party and its leader, Mulayam Singh Yadav, for now, which might be enough to maintain its rule.

While allowing 51 percent foreign ownership in multibrand retail has been a big step forward, the argument against it has been brewing and is intense. It is to these arguments that the prime minister spoke, saying “the time had come for hard decisions. And the people had a right to know why his government had taken these decisions.”

Only 7 percent of the Indian retail market is organized, with the vast majority made up of tiny independent stores or stalls. Store owners have protested that opening up the economy to international retailers will create unfair competition that will wipe out the independent retail sector.

As for overseas retailers, they view the new rules as having too many restrictions. Each state will be allowed to decide if they want to allow global retailers in; only 10 states and Union Territories have come forward at this time out of 28. In addition, each overseas retailer must invest a minimum of $100 million and they are to open only in cities with a population of more than 10 million. Additionally, back-end infrastructure has to be supported with at least 50 percent of FDI within three years of the first investment.

“Misinformation was used in 1991 as well when we brought in reforms, but those behind it did not succeed then, they will not succeed now,” the prime minister said, as he exorted people not to “be misled by those who want to confuse you by spreading fear and false information.”

Since the government has for now won the battle for its survival, Singh defended its recent decisions, admitting that the country was in a dire economic situation and the government had the “best interests of the common person in mind.”

Adi Godrej, chairman of the Godrej Group and president of Confederation of Indian Industries, said the prime minister’s speech was indicative that the economy is likely to get stronger. “His comparison with 1991 was very apt. I am impressed with the action last week and today’s speech; the government has good support. Mamata’s pullout may strengthen the government — the stock market went up and the rupee appreciated.”