The Indian government decided at the end of last week to allow 51 percent foreign direct investment in multi-brand retailing, after many months of dithering and sometimes virulent debate. A decision to open up the Indian retail market last November had to be put on hold as it provoked a political backlash and the ire of small shopkeepers.
The move is meant to prod the Indian economy, which has seen its expansion totter amid accusations of governmental lethargy and appalling corruption scandals. It is also meant to stave off inflation on food prices, which has been particularly tough on India's least well-off citizens. At the same time, the intended reform could entirely reshape a huge retail business that has been dominated by small independent stores.
The reactions were still cautious this week, given the government's U-turn on the matter a few months ago. Several opposition parties have already protested and demonstrations are likely. Furthermore, it remains to be seen under exactly what conditions majority FDI will be allowed: It has been reported that the central government had delegated the decision on individual investments to state governments – and the chief minister of Kerala was already quoted as declaring that FDI in multi-brand retailing would not be allowed in the state.
For the time being, the leading international brands operate in India with hundreds of mono-brand stores run by franchisees, and wholesalers offering their products to hundreds more small independent retailers. The new rules may well encourage more international sports retailers to open their own stores in India: Décathlon is the only foreign sports retailer in India so far, with just two stores that have been forced to sell their products on a cash-and-carry basis.
Another consequence of the government's decision is the fact that foreign retailers may be allowed to buy majority stakes in existing networks. The only sizable Indian chain of sports stores, Planet Sports, is owned by the debt-ridden Future Group, which may well leap at the opportunity to offer a majority in the company.
Furthermore, the government also decided to apply somewhat less stringent rules on foreign-owned mono-brand stores. They were previously obliged to source at least 30 percent of their products from small and medium-sized manufacturers. That rate still stands, but Indian newspapers reported that retailers may now source their products from larger Indian suppliers. Retailers may also obtain a waiver by setting up their own production units in India. The rule on sourcing from small suppliers has been an obstacle for the entry of foreign retailers such as Ikea.