Global retailers adopt wait-and-see stance over India’s perplexing foreign investment policy

The US retail giant Wal-Mart’s move to suspend its expansion plans in India highlights the country's perplexing foreign investment policy.

India requires foreign chains to source 30 per cent of their products from local small and medium-sized enterprises. Vivek Prakash / Reuters

Attracting investment funds to India’s retail market remains a major challenge as investors await greater clarity on confusing foreign direct investment (FDI) rules.

The American retail giant Wal-Mart’s recent move to put its expansion plans in the country on hold highlights the problem.

“Until retailers find clarity, they will wait and watch,” said Ankur Bisen, a vice president of Technopak, an Indian consultancy. “The entire environment of FDI in retail has not been clear right from the word ‘go’.”

In September last year, India's government opened up the retail sector, allowing foreign direct investment of up to 51 per cent in multi-brand stores. As a result, overseas chains can set up supermarkets in India for the first time.

More than a year later, however, no foreign supermarket chains have done so.

Although New Delhi in August eased its strict conditions for proposed investments, that has not led to business applications from investors.

The decision to welcome foreign supermarket chains had sparked protests across the country. Opponents argue that the move would put a number of small shops out of business.

But analysts say FDI is much needed, given that India’s economic growth has slowed to its lowest levels in a decade in the past financial year even as the country struggles with large fiscal deficits.

Wal-Mart, the world's largest retailer, this month dissolved its joint venture in India – involving wholesale cash-and-carry stores – with Bharti Enterprises. It also suspended its plans to open supermarkets, citing India's requirement for foreign chains to source 30 per cent of their products from local small and medium-sized enterprises.

“Wal-Mart’s withdrawal is definitely a setback for India’s FDI plans,” said Kamal Sen, the president and chief executive of Cogitaas, a strategy and planning consultancy.

“India needs to have both clarity and commitment to allowing FDI in spite of local pressures to the contrary,” Mr Sen said.

“From 1992 to 2007, India was clearly moving towards opening up its economy, liberalising exports, imports and FDI.

“In the last five years, the situation has been less clear. Retroactive taxation, unclear policies, opposition by state and local governments have all played a role in dampening investor sentiments.”

Technopak’s Mr Bisen said there was significant foreign investment interest in India’s retail sector, but he said foreign investors with long-term plans “were treading the path with caution”. Nevertheless, “India was too hard to ignore as an opportunity”, he said.

With a burgeoning population exceeding 1.2 billion and growing wealth, India is one of the most significant untapped markets for global retailers.

“The lack of policy response from the government left a lot of foreign retailers with no choice but to wait or negotiate hard with the government,” said Mr Bisen.

With general elections expected next year, analysts say investors might wait for the results before committing any funds to India.

In 2007 Wal-Mart set up its joint venture with Bharti Enterprises. Currently, it is acquiring Bharti’s stake and plans to run the 20 stores under the Best Price Modern Wholesale label itself.

Foreign companies are allowed to own 100 per cent of wholesale stores in India, but they need a joint-venture partner to open supermarkets.

The challenges that Wal-Mart is facing in India include an ongoing investigation on whether the joint venture with Bharti violated FDI rules, and another on Wal-Mart’s lobbying activities to enter India.

For its part, Wal-Mart insists it has not given up on India.

“We will continue to advocate for investment conditions that allow FDI in multi-brand retail in India,” said Scott Price, the chief executive of Wal-Mart Asia.

“Given the circumstances, our decision to operate independently will be beneficial to both parties.

“Through Wal-Mart’s investment in India, including our cash-and-carry business, supply chain infrastructure, direct farm programme and supplier development, we want to serve India and its people, and continue to make important social and environmental contributions to the country.”