By  on December 28, 2010

NEW DELHI — The argument over foreign direct investment in multibrand retailing in India is heating up.

Indian retailers have been reacting to a recent decision by a government panel that voted against opening up FDI in multibrand retailing at this time. Only 65 out of 180 respondents to the government’s discussion paper were in favor of allowing more FDI, while 113 were against it.

India does not allow any FDI in multibrand retailing, although it does permit overseas companies to own 51 percent of firms in the single-brand sector. FDI in retail has been a key focus for foreign politicians and companies as the sector is one of the country’s fastest growing, increasing at 30 percent to 40 percent a year. According to the BMI India Retail Report for the third quarter of 2010, total retail sales in India will grow to $543.2 billion by 2014 from $353 billion this year.  

“Opening up foreign investments will bring in funds required for expansion of the nascent modern retail sector in India,” said Kishore Biyani, chief executive officer of Future Group. The group’s Pantaloon Retail division has more than 200 stores in different formats. “The market opportunity is large and we support opening up of the sector to FDI,” said Biyani.

The number of company-owned Pantaloon stores is expected to double in the next three to four years, from the current 50, with a planned investment of 21 billion rupees, or $464.1 million at current exchange. Future Group has several other store formats, including Central and Big Bazaar, and had turnover of 25.81 billion rupees, or $570.4 million, in the quarter ended Sept. 30, compared with 19.54 billion rupees, or $431.8 million, last year.

The issue of FDI became a hot topic again last month, when President Obama urged India to relax its regulations during his visit to the country, and was in the headlines earlier this month when French President Nicolas Sarkozy made the same argument. Christine Lagarde, French minister for economy and finance, said French companies could invest more than 10 billion euros, or $131.4 billion, over the next two years in the multibrand retail and insurance sectors.

“If the Indian authorities consider it sensible to open up the sectors, I know French companies will significantly expand their activities,” she said in New Delhi. In discussions with commerce and industry minister Anand Sharma, Lagarde mentioned that the issue was about “give and take” and that India could learn from French expertise.

But the foreign leaders’ comments ignited protests in New Delhi, with thousands of Indian retailers taking to the streets and marching outside Parliament. Protests were made against free trade agreements as well.

Thomas Varghese, ceo of Aditya Birla Retail, which has a huge expansion plan for India and has been in talks with Carrefour to bring the chain into India, observed, “In my view, those who oppose FDI have not necessarily taken into account the experience in other countries, where the rise in organized retail has not led to the demise of local traders, who have also grown. Rather, it has led to benefits to farmers, who get another more transparent market for their product as well as improvement in supply-side infrastructure.”

Varghese’s argument is one made by foreign executives from firms such as Wal-Mart Stores Inc., Tesco plc and Carrefour, who contend that opening up India’s retail sector, especially in food, would spur growth and thus increase demand for farm products. Overseas executives also contend more foreign ownership of retail in India would raise the standards of the country’s retail sector as a whole since local firms would have to compete.

Predicted Anil Agrawal, an independent industry analyst, “FDI in multibrand retailing is certainly going to happen. The only real question is about the timing.”

The Indian market is dominated by thousands and thousands of small retailers, however, with only 5 percent of the market accounted for by so-called organized retail, as opposed to independent operators. It is the smaller firms that are strongly against more FDI in the industry. For example, Jugul Sharma, who owns a small store in South Delhi’s Lajpat Nagar market, argues that bigger, foreign companies will wipe out retailers like him. It’s a claim that has been taken up by India’s opposition parties, which are firmly against FDI.

The committee on multibrand retail was set up by the Department of Industrial Policy and Promotion and included officials from agriculture, food processing and consumer affairs, who appeared in favor of the opening up of FDI. They also had the support of the Planning Commission. The committee’s discussion paper, which has been awaited as a final nudge toward a change, instead leaves the issue in limbo once again. A follow-up paper is expected in coming weeks, with a wider debate and more participation.

India has slowly been opening up the retail sector to overseas investments over the last few years. In January 2006, a major change in policy resulted in allowing overseas companies to solely own single-brand retail firms. Subsequently, 100 percent ownership also was permitted in the cash-and-carry trade.

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