India Liberalizes Investment in Retail Sector

    Author: Bikram Pandey
    Last Update: 5:32 PM ET November 24 2011
5:25 PM New York – India’s cabinet approved a new measure to liberalize its organized retail sector that will allow foreign retailers to increase their stakes to 100%. The latest reform is expected drive many small retail shops out of business and is widely opposed by the leading opposition parties.

India’s ruling coalition led by Congress Party approved the reform that are sought by foreign retailers and opposed by most labor organizations and political parties.

The newly approved measure by the cabinet will permit foreign retailers to hold 51% stake in multi-brand stores and permit 100% ownership in single-brand stores.

Under the new measures Nike and Apple can start a retain chain in India with 100% ownership of the local subsidiary but retail chains like Target, Wal-Mart Stores and Home or Tesco can hold only 51% stake in the local company.

Prime Minister Manmohan Singh is expected to make a statement in the lower house of the Parliament on Friday.

Consumers fear that foreign stores will only jack up the price of food items that are already galloping at the fastest pace in last three years and much of the food production will be diverted from smaller towns to larger cities.

Food prices in India have risen at more than 11% a year in the last three years in a row.

More than six million families in India rely on retail store based businesses and the sector is the largest employer in the nation. Most retail stores in India have a corner store format with most of them less than 300 square feet in size.

India’s retail sector is about $450 billion in size and is growing at 8% annually. Supermarkets and chain stores control only 5% of all retail sales but sales at these chains are growing at more than 15% in the last three years.

Most consumers in India still shop at family owned shops with limited collection of merchandise and lacking refrigerated storage and the industry is widely fragmented with several middlemen.

Food retailing, the most contentious segment of the industry is riddled with supply chain inefficiencies and widespread wastage.

Several private estimates suggest that at least one third of grown fruits and vegetables are thrown away every day because of poor linkages to wholesale markets from the farms and the lack of air-conditioned storage warehouses.

However, foreign retailers generally focus on the most expensive items and rarely focus on the needs of the masses and generally divert produce from smaller towns to larger cities that will further fuel price inflation.

Wal-Mart Stores Inc is operating in partnership with Bharti Enterprises but the joint venture is permitted to operate only the wholesale venture that supports retail stores.

Similar ventures are also struck by Australia based Woolworths Limited and Germany based Metro AG runs eight cash and carry large formats stores.

Prices at stores operated by foreign chains are higher than locally owned stores and focus on imported items that are in demand from the upper middle class families.

Foreign retailers are generally expected to replace the sales from domestic stores and the consumer expectations of lower prices not likely to materialize according to most retail experts in India.