NEW DELHI — The Indian government’s decision to allow foreign direct investment in retailing has set off a storm of protest that is threatening the stability of the ruling coalition.
This story first appeared in the September 20, 2012 issue of WWD. Subscribe Today.
The government said Friday that it would allow 51 percent foreign ownership of multibrand retailers, which had long been sought by global chains such as Wal-Mart, Tesco and Carrefour. A 72-hour deadline to withdraw the retail reform was immediately set Friday by Trinamool Congress chief Mamata Banerjee, who succeeded in making the government withdraw the plan the last time it was proposed, in December 2011.
The situation is as serious now, since as an ally in the ruling United Progressive Alliance, or UPA, government, her withdrawal from the alliance could mean the end of the present government and, consequently, of all economic reform.
Although the deadline expired Tuesday evening with Banerjee saying she was withdrawing her support of the UPA, she is still playing a negotiating card with the resignations to be handed in only on Friday, leaving a window for negotiation.
“Those already here are a worried lot,” said Arvind Singhal, chairman of Technopak Advisors of foreign retailers already established in India and eager for a more open market.
The government is standing firm, for fear of appearing weak, and also because of the economic impact that FDI would have.
“The decision to allow 51 percent FDI in multibrand retail will result in investment of $2.5 billion to $3 billion in the retail sector over the next five years,” a report by Crisil Research noted Tuesday. Others have estimated the investment will be four times that amount.
Crisil also predicted that organized retail would increase from the present 7 percent of the market to 10 percent by 2016-17.
Each Indian state will have the right to decide whether to accept FDI in retail, with 10 supporting it so far. But the limitation increases the complexity of the situation for overseas retailers operating in India.
“It would be a limiting factor for chains while taking crucial decisions,” said Singhal.
A report from J.P. Morgan on the new decision noted, “Given the state level discretion involved here, the company may have to consider separate alliances or partnership structures.”
Today, businesses throughout the country are expected to take part in a bandh, or a roll down of retail and business shutters that has been called by the opposing political parties. This is in protest of the government’s FDI decision but also against the increase in the price of diesel by five rupees and a cap of six subsidized propane-gas cylinders per family each year, which are used for cooking.