FDI in Indian Retail : One step forward . . .

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As Delhi put its proverbial foot to the accelerator to gear up for the Commonwealth Games over the past week, the Indian economy at large was not delinked from the spirit of sport. Indeed, the Olympic motto of ‘faster, higher, stronger’ is easily apt for the some of the economic indicators and signals that were revealed.

1. The Bombay Sensex reached a 33-month high.
2. India now home to as many as 69 dollar billionaires, compared to 52 last year (Forbes).
3. 127,000 High Net Worth Individuals[1], whose cumulative wealth stands at US$477 billion resident in India (2010 Asia-Pacific Wealth Report, compiled jointly by Cap Gemini and Merrill Lynch Global Wealth Management).
4. India’s growth is likely to outpace China’s (cover story of the latest Economist).

Ostensibly sensing the mood, the Government of India decided to give greater steer to the economy. It announced an easing of the norms for foreign direct investment (FDI) for a few sectors including wholesale cash-and-carry trading.

The Indian retail sector is arguably the most watched and contentious sector on India’s economic horizon. With growth trends and forecasts being what they are (see earlier blog post), this is not surprising. The policy amendment removes the restriction for internal use by the foreign wholesale cash-and-carry segment. It, however, retains the ceiling, mandating that such companies could sell only up to 25 per cent of their turnover to group companies. The move has implications for several retailers such as Bharti-Walmart, Carrefour and Metro Cash and Carry.

This relaxation comes at a time when much debate is underway regarding opening up of the retail sector to foreign investment. Since 2006, FDI up to 51 per cent has been permitted in single-brand retailing in India. 100 per cent FDI has been allowed under the automatic route in the cash and carry wholesale business. A few months ago, the Indian Ministry of Commerce had released a discussion paper on the issue of multi-brand retail, soliciting opinions. While Commerce is in favour of easing norms with some restrictions, the Ministry of Finance is said to be in favour of a more cautious approach.

Some innovative players are not letting these current restrictions be a bottleneck. Instead, they are crafting innovative solutions within the defined goal posts while the patiently nudge the public policy eco-system.

Interestingly, the organised, domestic retail sector is keen to see opening up. Indeed, there are strong and vociferous proponents on both sides of the fence. At what pace the situation evolves and its implications for the economy only time will tell. Perhaps it will be a case of catching the tiger by its (re)tail.

If you would like to increase the growth of your organisation by deepening its engagement with India, do write in at ratika.jain@whiteowladvisory.com .

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[1] Has “investible assets of $1 million or more, excluding primary residence, collectibles, consumables and consumer durables”. 

Why cherry picking is no longer seasonal in India

Much of what I am reading in headlines these days – on India and, indeed, the global economy –  reminds me of the opening lines of ‘A Tale of Two Cities’ – “It was the best of times, it was the worst of times…”. Why do I say this?

1)  The Indian Stock Market – Often considered a bellwether of the economy, I came across two different articles (thankfully, in different publications) on the same day this week.  One referred to a leading fund manager’s prognosis that the benchmark Bombay Stock Exchange Sensex will cross the 30,000-point level (currently hovering around 18,000) in the next 3-5 years.  The other publication informed me that one out of every six Sensex stocks is at its lifetime high.   Furthermore, the Sensex is about 3,000 points, or close to 14%, shy of its historical peak.  It went on to predict that a correction in Indian stock markets is imminent.

2) Telecom – Gartner, the technology research agency, says that mobile connections in India will grow by 27.3 percent in 2010.  Yet, India’s largest private telecom companies – Bharti Airtel and Reliance Communications – have gone on record to aver that ‘virtual’ consolidation is underway in the country’s crowded telecoms market. According to them, new entrants are scaling down their rollout plans and shying away from reducing tariffs further. 

3)  Automotive – The Wall Street Journal tells me that the Indian automotive boom is getting ‘bubbly’ with approximately 33% of respondents in a recent KPMG survey of auto executives predicting that India would be struggling with overcapacity in the auto sector within the next five years.  At the same time, auto executives and analysts agree that if the prices and products are right, India will have no trouble boosting passenger car and commercial vehicle sales. The KPMG survey also revealed that 40% of respondents expect sales to climb to more than four million by 2014, compared to 2.5 million at the end of March 2010.

4)  Retail – For the 4th time in five years, India has been ranked as the most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney in its 8th annual Global Retail Development Index (GRDI) 2009.  India's retail market is expected to be worth about US$410 billion in 2010, with 5 per cent of sales through organised retail. Retail should continue to grow rapidly—up to US$ 535 billion in 2013, with 10 per cent coming from organised retail. Yet, according to another study earlier this year, over 6.57 million sq ft of mall space is lying vacant across eight major cities in India.

Is one analysis right and the other wrong?  Not necessarily. 

While headlines are clearly becoming heady, what is obvious is that growth is no longer ubiquitous in India.  According to the wisdom of the crowds embodied in IBM’s 2010 Global CEO study, corporate leaders believe that a rapid escalation of complexity is the biggest challenge confronting them.   They expect it to continue and, in fact, accelerate in the coming years.  As Goethe, the German thinker, eloquently expounded 200 years ago: ’Everything is simpler than you think and yet more complex  than you imagine’.