India’s foreign direct investment de-regulation met with political hostility

By Kacey Culliney

- Last updated on GMT

Related tags: Foreign direct investment, Investment

India's FDI policy taps into political sensitivities
India's FDI policy taps into political sensitivities
India’s foreign direct investment (FDI) reform made last week has been met by strong political opposition that threatens the passing of the law.

The Indian government approved 51% FDI in its multi-brand retail sector, marking the opening of the $450bn market to international companies.

Chief ministers of several government-allied states are pressing the government to reverse its move and today, Parliament was adjourned amid uproar from legislators.

Opposition is concerned that the entry of foreign players will threaten small, independent Indian retailers (locally known as kiranas).

In response to the political uproar, the government today amended the terms of investment, stating that foreign retailers will have to source 30% of their goods from small Indian industries.

Clive Black, head of research and retail analyst at Shore Capital Stockbrokers, told FoodNavigator-Asia: “There is a lot of political sensitivity around this.”

What would the reform mean for manufacturers?

Nick Everitt, director of Retail Insight at IGD Retail Analysis said: “International retailers will bring technology, expertise and funds to invest in building robust supply chains across the country, thereby improving efficiency and food safety, and reducing wastage along the chain.”

He said that the move will improve links between farmers and retailers, eliminating the middlemen and thus reducing cost.

Black said that both Indian and international manufacturers will benefit from this improved supply chain.

“For some manufacturers, the modernisation of supply chains throughout India means that they will see material increase in volumes and market shares,”​ he added.

Black said that India’s current distribution industry remains old-fashioned by international standards.

The appeal for consumers, he said, is that the reform could ultimately lead to prices falling as the industry is modernised, streamlined and made more efficient.

Market implications

Everitt acknowledged the level of debate about how FDI will impact kirana traders but said that they should be able to co-exist and develop alongside foreign retailers due to their strong market and consumer knowledge, fresh produce and excellent service.

Greater market investment from foreign investors will generate employment along the entire supply chain, he said.

IGD estimates that modern retailing accounts for approximately 10% of India’s total food and grocery spend with a substantial geographical split in the penetration of supermarkets.

Everitt noted that there is still an estimated 12m traditional outlets across India with the majority of sales coming from traditional wet markets.

According to IGD data, India’s grocery market represents 73.9% of its total retail market.

It is ranked third largest in Asia after China and Japan, and fourth globally with America at the top.

However, due to regulation, the food market remains untapped by international players.

Black said: “Multi-brand owners are not allowed in India… it is a highly protectionist regime. It doesn’t mean it is a bad one, it is just very protected.”

Challenging and complex market

Entering the Indian food retail sector, added Black, is not without its challenges as with any new market.

“There are challenges with building relationships, working in the political environment and issues with supply chain,”​ he continued.

If the policy is passed, we do not expect any real changes to happen soon, in terms of internationals flocking to enter the market, Black said.

The policy is merely a stepping stone, he said, “this is going to be generational; it’s something that is certainly not going to happen within the next four to five year. It will take much longer.”

Related topics: Policy, South Asia, Industry growth

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