NEW DELHI, India — While the first year of Prime Minister Narendra Modi has won praise, one of the major issues that remains to be addressed is what to do about foreign direct investment in the key multibrand retail sector.
Even as India’s economy overtakes China’s as the world’s fastest-growing, global investors have been waiting and watching the $550 billion Indian retail industry in hopes that a resolution might be near. In 2013, the previous government had sanctioned 51 percent foreign direct investment in multibrand retail, despite severe opposition by the Bharatiya Janata Party, which is now in power.
Over the last year, there has been no clear answers for global retailers.
There were signs that FDI would remain barred in Indian multibrand retailers, but then Tesco PLC was given the go-ahead to enter the market via a joint venture with Trent Hypermarket Ltd., a unit of the Tata Group, and an investment of $140 million. On the other hand, French retailer Carrefour said it would close its five stores and pull out of India in July 2014.
Mixed signals coupled with the confusion have only increased over the last week.
Last Tuesday, the Department of Industrial Policy and Promotion (DIPP) issued a policy document keeping the government’s decision to allow up to 51 percent FDI in multibrand retailing. The retail industry and the media hailed the ruling as the Modi government finally giving some clarity to what had been an ambiguous situation.
However, at the end of the week, finance minister Arun Jaitley was more specific, saying in a TV interview that, “I owe it to all investors to make it absolutely clear that the DIPP’s circular clearly indicates what the old policy is, but I have put a caveat to say that the present party in power has never been enthusiastic about this.”
He said that although global retailers could come into India, it was clear that the party in power was not in favor of the policy and that could result in a lot of problems for them.
“With regard to this decision, as of today we have not decided to reverse that policy [barring FDI]. So on paper, that policy continues,” he said.
Separately, Nirmala Sitharaman, minister of state at the Department of Commerce and Industry, said she would not consider any proposal to open multibrand retailing to foreign direct investment and would ask the cabinet to delete the provision.
Stung by the confusion, the Confederation of All India Traders said that the contradictory statements by Jaitley and Sithraman “have created a peculiar situation in as much as it has generated a lot of confusion amongst the trading community of the country.”
The government is also trying to work its way around another controversial issue — foreign direct investment in e-tail, and held its first round of talks with e-tailers on the issue of allowing FDI in the sector on May 14. This brought the simmering discontent between brick-and-mortar retailers and e-tailers to a head.
The expectation that FDI in e-tail may take precedence over its longer-suffering brethren incensed physical retailers to move the high court against the government last week.
E-tail is less than 3 percent of the total retail industry at this time, but it is expected to grow to $70 billion by 2020. It has also seen strong interest from global players such as Amazon and eBay, which are allowed to have marketplace models in India. Flipkart, the biggest e-tailer that has been valued at about $15 billion, has also received several rounds of global funding.
It’s a big game, and not just for the e-tailers — the Indian retail industry is forecast to quadruple over the next decade, to $2.1 trillion by 2025, according to a survey earlier this month by CII and consulting firm Wazir Advisors.
Modi has been praised for his clarity in the 12 months that he has been in office, and retailers in India are betting that the prime minister will open the sector more definitively in coming months.
Most brands and retailers point to the potential of a market of a billion people with growing spending power. As independent industry analyst Ravi Sharma observed, “Then they take their chances. The franchise route, as brands like the Gap have chosen, or foreign direct investment in single brand retail as H&M has done. Multibrand FDI may take some maturing…”
What is adding to multibrand retailers’ eagerness to enter the market is the fast-growing Indian economy as other countries — including the other BRIC nations Russia, China and Brazil — are experiencing slowdowns in growth. India has recorded the highest index score in consumer confidence in the Asia-Pacific of 130, a one-point increase from the previous quarter and a level that has not been seen since 2011, according to the Nielsen Global Survey of Consumer Confidence and Spending Intentions.
“India is currently the fastest-growing economy in a global environment that remains soft,” said Sumit Mazumder, president of the industry body Confederation of Indian Industries. “CII expects GDP growth to lie in the range of 7.8 to 8.2 percent in 2015-16.”
Economic growth, which had dropped to 5 percent in 2013-14, has been estimated at between 7 and 8 percent for 2014-15, exceeding that of China for the first time in 15 years. Modi’s promise of “policy-driven proactive governance” was reiterated on Tuesday, as he has focused on creating a relatively clutter-free business environment, sifting through bureaucracy to simplify and “get things done.”