NEW DELHI — As Air Force One touched down here Sunday, bringing a large business contingent along with President Obama and First Lady Michelle Obama, chief executive officers of Indian companies were adding their final touches to days of thought and preparations for the meetings scheduled over the next three days.
Before Obama’s visit — even as a civil nuclear pact, defense cooperation and strengthening trade ties were reportedly on the agenda — there was considerable energy and hope being invested in the visit by retailers in India.
The Indian market of more than one billion people has been seen as one of the most attractive in the world, with a fast growing consumption pattern and a middle class keen on shopping. The retail market in India is worth about $550 billion and is expected to grow to $740 billion by 2016-17, according to a study by Yes Bank and the The Associated Chambers of Commerce of India (Assocham).
Shortly before Obama’s visit, the importance of the retail market was raised by two US senators who are co-chairs of the bipartisan Senate India Caucus, in a letter written to the President. Senators Mark R. Warner and John Cornyn wrote that the President shouldrequest Indian Prime Minister Narendra Modi liberalize foreign direct investment (FDI) restrictions in the e-commerce sector and that such a move would benefit both countries economies.
Both senators are said to be part of the team accompanying Obama, along with Ami Bera, co-chair of the Congressional Caucus on India and India Americans, Democratic Minority House Leader Nancy Pelosi, Commerce Secretary Penny Pritzker, US Trade Representative Michael Froman, National Security Adviser Susan E. Rice and Counsellor to the President John Podesta.
In a break from protocol, Modi went to the airport to welcome Obama on the tarmac at Palam airport. They met with a warm hug — which is being read by industry watchers as a sign of change in the often strained relationship between the two countries, on both trade and political issues.
Obama also is breaking with tradition as well — he is to be chief guest at India’s Republic Day parade on Monday – the first time a US president will visit another country for its national day. He is also the first US president to visit India twice during his tenure.
An agreement by the two leaders on a nuclear deal was unveiled on Sunday, clearly a breakthrough that will allow American companies to supply India with civilian nuclear technology. Other important items on the agenda for discussion reportedly include defense, climate change and trade and investment issues.
Retailers are watching carefully to see what gifts Obama will bring to them in India, and in turn take back for global retailers such as Wal-Mart who have been negotiating their way through a maze of what is seen as unwieldy and often unclear rules by the Indian government.
The $3.5 billion ecommerce space is being watched closely as well, with etailers Amazon and eBay among the fastest growing in the Indian market. As FDI in ecommerce is not allowed, both companies follow a marketplace model. The push allowing them to be able to sell directly to customers has been gathering force over the last year.
Jeff Bezos, Amazon’s chairman, met Modi during a week long visit to India in October and made clear his intentions of growth and investment in India — making a commitment of $2 billion in Amazon India. Having started in India only in June 2013, the company is expected to be the fastest growing ecommerce company in the country.
The letter written to Obama by Warner and Cornyn made it clear that the growth of this segment was not just a benefit for US retailers and that the online generation of additional retail transactions in India would “increase consumption, decrease consumer prices, improve market access for small- and medium-sized companies, and create jobs across a range of professional fields.”
“It also has the potential to increase competition in India by providing less expensive goods and create 250,000 jobs directly with the potential for more than 1 million jobs in customer service, IT, logistics, transportation, and administration by 2021,” they noted.
The ecommerce market in India is particularly attractive as it is expected to grow dramatically in the next few years. Research and consultancy firm RNCOS has predicted that the online retail market in India will grow at a compound annual rate of 40 to 45 percent during 2014-18, to $14.5 billion by 2018.
With more than half of India’s population under the age of 30, sales for apparel and accessories are expected to be big drivers in the growth in coming years.
One of the key issues has been the opening up of the retail sector — 100 percent FDI in single brand retail was allowed in India in January 2012. However, there was a requirement of mandatory sourcing of at least 30 percent of the total value of the products sold from Indian small and cottage industries, artisans and craftsmen.
In October 2014 the government cleared three applications in single brand retail, including Danish fashion wear company Bestseller, German sportswear retailer Puma SA and American beauty retailer Lush.
However, Rajat Wahi, partner in consulting firm KPMG India, observed that the real change would be likely to be in single brand retail in India. “Multibrand is quite a challenge. I don’t see this coming up immediately as the government still has to look at the 12 million mom and pop stores in the country. It’s a tough subject and there isn’t enough data to say how the organized market will respond,” he said.
There will be other issues that will help retailers, he noted, including easing investment and simplification of tax structures.
India’s indeciveness about multibrand retail appears to be an area of concern for US retailers.
Although 51 percent FDI was allowed in multibrand retail in September 2012, with state governments being allowed to make a final call about global retailers setting up shop in their state, there continues to be ambiguity surrounding the process and clearances.
A change of ruling party last May with the Bharatiya Janata Party (BJP) coming to power — the party clearly opposed opening up the retail sector while it was in the opposition — has caused additional confusion among retailers.
A current test case is the entry of Tesco for the U.K., whose investment of $110 million was approved in December 2013, under the previous government, and which has been allowed to proceed with its 50:50 joint venture with Indian company Trent under the new government. Wal-Mart continues to be one of the biggest retailers knocking at the doors of Indian bureaucracy, as it attempt to find ways to make retail growth and business in India more plausible.
While closely monitoring statements from Modi to make it easier to do business in India, and bring in more investment, economists are betting that the retail segment will not be long in opening up with more absolute clarity.
Jagdish Bhagwati, professor of economics at Columbia university, who was in New Delhi earlier this month, said that India was on the “cusp of a second economic revolution” and that he expected the Modi government to soften its stance on retail foreign direct investment “within a year.”
Industry leaders agree.
Ajay Sharma, senior director of ASOCHAM, said that India was certainly “on the move with the new government.”
“The industry and the market are ready for opening up retail. I think the new government is just waiting for these signals and is not against it,” he said, citing some key factors that US retailers needed to consider for growth in India.
“Brands need to re-examine their strategy in India,” he observed. “How many global brands are promoting themselves aggressively? Not enough. They also have to remember that affordability is very important to the consumers, and this needs to be taken into account. Retailers also need to be far more innovative in India, about the locations and possibilities of opening new stores as real estate prices are high, and also in terms of designs and sizes in terms of apparel for the local market. It is very important to understand the market dynamics in India.”
Ajay Singh, executive director of the American Chamber of Commerce in India (AMCHAM), noted that an additional factor to keep in mind about India is that it is a “long-term market” and investments must be made on this basis.
“The last few years have been quite traumatic for investors. But there is a definite change in approach at this time. The whole approach is now changing from being about global companies being ‘allowed to do business in India’ to ‘welcoming them to do business here’,” he said.
He said that these changes were apparent as issues facing more than 30 companies, including Amazon, had been directly addressed by the government in December and January to speed up and ease business.
“The new government is addressing policy changes, but realizing that this takes time, they are addressing grievances directly to help facilitate and resolve them faster.The government is changing the ‘say/do’ ration — of what they say and what they do, very fast,” he said.
Overall, economists in India agree that the next year will be the tipping point for retail markets in India.
On Sunday, President Obama appeared to be setting a new tone for US interests in India.
His opening line, at the joint press conference with Modi on Sunday, was in Hindi, “Aap sab ko mera pyar bhara namaskar” [“I greet you all with love”] and in the end, another line which summed it up best, “ in the end, I would like to say ‘Chalein saath saath’,” he said, meaning, “Let us walk together.”