November 26, 2011 in Business

Retail sector in India opens to global chains

Muneeza Naqvi Associated Press
 
Associated Press photo

A woman shops in Hyderabad, India, on Friday. India’s commerce minister said the decision to open the country to global chains such as Wal-Mart has a safety net for small shops and farmers.
(Full-size photo)(All photos)

NEW DELHI – India’s commerce minister said Friday that the decision to open the country’s $400 billion retail sector to global chains such as Wal-Mart has a built-in safety net for small shops and farmers.

Anand Sharma told reporters that the Indian Cabinet’s decision late Thursday allowing 51 percent foreign ownership of supermarkets would vastly improve decrepit infrastructure that causes massive food waste in a country plagued by malnutrition and high inflation.

Sharma said the new rule would only apply in cities with more than 1 million people. The minimum investment would be $100 million and half of this would have to be invested in rural infrastructure and refrigerated transport and storage. Thirty percent of the produce sourced by the retailer would also have to come from small and medium enterprises.

Top retailers such as Wal-Mart and Tesco have lobbied for years for a chance to build stores in the nation of 1.2 billion people, and political deadlock on long-promised reforms in retail and other areas has helped cool foreign investor interest in India. Foreign retailers have Indian partners in wholesale operations, but no retail stores.

The Cabinet also allowed 100 percent foreign ownership of single-brand retail operations, up from 51 percent.

Advocates see the move as a way to strengthen India’s creaking food distribution system.

The country suffers chronically high malnutrition and soaring inflation, but it’s not for lack of food. It is the world’s second-largest grower of fresh produce, yet an estimated 40 percent of fruit and vegetables rot because of a lack of refrigerated trucking and warehouses, poor roads, inclement weather and corruption. That means lower incomes for farmers and higher prices for consumers.

If companies like Wal-Mart and Tesco can open shops of their own, the investments they make in improving farming techniques and getting produce into stores more efficiently could lower food inflation and possibly raise rural incomes.

Sharma said the policy would have a “multiplier effect” and tens of millions of people would gain jobs.

Analysts say India’s darkening economic prospects gave fresh urgency to the decade-long talks on opening up India’s retail sector. Many see Thursday’s move as an attempt by the ruling Congress Party to reassert its leadership, which has been weakened by corruption scandals, soaring inflation and slowing growth.

“When the government’s credibility seems to be under significant question, this is one way to give a message that the government is still in business and it means business,” said Arvind Singhal, chairman of retail consultancy Technopak Advisors.

The central bank has raised interest rates by 5.25 percentage points over the last 18 months but that hasn’t been enough to control runaway inflation or the rupee’s freefall. Food inflation, which quickly becomes a political issue in India, has been bouncing into the double digits since 2008.

“Monetary policy interventions have not been able to control inflation,” Singhal said. “Now they have to look into supply-side policy, which could have an impact.”

International investors, who have grown increasingly wary of corruption, surprise tax bills and shifting regulations in India, have also put pressure on the government to grant them greater access.

The change, which does not require approval by India’s fractious Parliament, was opposed by the Trinamool Congress Party, a key partner in the ruling coalition, and the main opposition party. The country has struggled to find consensus because of concerns that competition from the foreign retail giants could hurt millions of small shopkeepers, as well as the poor.

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