Last year, the Swedish furniture giant IKEA, which has a strong footprint across emerging markets, could hardly resist the temptation of investing in India.
With a rapidly accelerating economy, India is in the throes of a retail revolution. Buoyed by the rising affluence and expansion of the middle class, the total retail sales in the country are expected to grow from US$353 billion (Dh1.29 trillion) this year to $543.2bn by 2014, according to estimates by the US-based global management consultancy AT Kearney. The McKinsey Global Institute estimates that India's middle class will swell by more than 10 times from 50 million in 2007 to 583 million by 2025. By then, India is expected to emerge as the world's fifth-largest consumer market, moving up from the 12th position it occupied in 2007.
But IKEA's plans to open stores in the country were hampered by India's tough rules for overseas investments in retail. India's retail sector is heavily regulated with strict limits on investments. A maximum of 51 per cent foreign direct investment (FDI) is allowed in single-brand stores, such as Reebok and Van Heusen. Multi-brand retail outlets are allowed to operate only through franchise tie-ups with local partners.
IKEA deferred its plans to open its stores in India "until it could fully own its retail operations". However, last week the company announced plans to double its imports of textiles and other material from India to €1bn (Dh4.95bn) over the next few years. It also made an impassioned appeal to the government to ease the country's stern investment rules. "In a country with such growth as India has, and where urbanisation is just starting, the need for home furnishings at low prices is enormous," IKEA's chief executive officer Mikael Ohlssonsaid in New Delhi after meeting the commerce minister Anand Sharma. "There will be enough space for IKEA and the existing businesses."
IKEA is among a slew of retailers including Wal-Mart, Carrefour and Tesco that have long demanded the same. The government in all probabilitywill relent. It is currently considering a proposal to allow up to 100 per cent foreign direct investment in multi-brand retailing. But the move is politically highly sensitive. For decades, the retail industry in India has been dominated by the quintessential "mom-and-pop" neighbourhood enterprises, known colloquially as "kiranas". The Federation of Indian Chambers of Commerce and Industries (FICCI) says more than 200 million consumers depend on kiranas.
It is feared these superstore chains could decimate the nation's estimated 15 million kiranas. These traditional retailers are a 40-million strong, unorganised workforce who are not protected under any national trade policy. This sector is the second-largest employer in India after agriculture. Some observers fear the cash-rich foreign retailers could introduce predatory pricing. Their commendable warehousing strengths and better infrastructure could drive the kiranas out of business.
But proponents of this view contend that opening up India's retail sector will modernise it. New, western-style stores will offer consumers wide aisles, refrigerated units, uniformed staff and a large variety of products. The move is also expected to bring capital infusion that could help bridge India's yawning fiscal deficit, which recently touched a 16-year high of 6.9 per cent of GDP. By curbing waste, it might also reduce the soaring food price inflation - which hit 8.5 per cent last month, higher than the central bank's predicted 6 per cent.
India's retail market is largely fragmented and only about 2 per cent of the sector is organised, says the Indian ratings agency CRISIL. There is, therefore, an potential for explosive growth. Together, China and India this year account for 91 per cent of retail sales in Asia. By 2014, their share of this lucrative regional market is expected to touch 92 per cent. In June last year, for the fourth time in five years, the CRISIL ranked India as the most attractive nation for retail investment among 30 emerging markets
According to India's department of industrial policy and promotion, the foreign direct investment inflows between April 2000 and March this year in single-brand retail trading stood at $194.6million. Industry observers say it needs far more capital infusion to modernise. "This is a very capital-intensive business," said Rajan Bharti Mittal, the president of the FICCI, who is also the managing director of the retail giant Bharti Enterprises. "We should allow investors to come in and create a viable ecosystem for the retail business. We currently waste 40 per cent of our fruits and vegetables because we don't have cold chains. That will change with investment and improved logistics."
But there is fear such a move could spark social unrest. When Reliance Retail, a subsidiary of the billionaire tycoon Mukesh Ambani's Reliance Industries, launched its retail stores across India in November 2006, it invited the anger of traditional retailers in several cities. Vegetable sellers, who complained it would kill their businesses, stoned its shops in Ranchi in the eastern state of Jharkhand. In Uttar Pradesh, the government ordered the chain to shut shops after some of its stores were ransacked.
But Mr Ohlsson insists foreign retailers will generate more employment opportunities for locals. He recently told officials in New Delhi that tens of thousands of jobs would be created, not just at its stores but throughout the supply chain. It also promised that if it were allowed to penetrate the Indian market, it would pump €125m over the next five years into social development initiatives with non governmental organisations such as UNICEF and Save the Children.
A joint report released last year by PricewaterhouseCoopers and the Confederation of Indian Industry called Rising Elephant: Benefits of Modern Trade to Indian Economy, traditional forms of retail will not become totally obsolete should foreign retailers move in. "Small retailers in India have inherent advantages," the report says. "They are located next to the consumer, making it convenient for top-up purchase. They know them well, some even by name. They give credit too, which no large retailer does. Their fixed costs are so low that their breakeven point is as low as 46 per cent of sales."