India's retailers are bracing themselves for a shakeup, after their government finally approved foreign direct investment (FDI) in retailing last week – a decisive move that could help to develop a more diversified and organized shoe retailing market in India.
The country's thousands of owners of tiny independent stores were hitherto protected by restrictions dictating that foreign investors could have maximum stakes of only 49 percent in multi-brand stores and 51 percent in single-brand stores. Several foreign retailers moved into India on a cash-and-carry basis, for which the rules already permitted foreign ownership. After many years of dithering, the Indian government's reform allows for FDI at 51 percent in multi-brand stores and at 100 percent in mono-brand stores, making such investments much more enticing.
However, the reform was accompanied by a set of conditions. In multi-brand retailing, foreign entrants will have to invest at least $100 million, and at least half of their entire FDI will have to go to back-end infrastructure. At least 30 percent of the manufactured and processed products offered in the stores will have to come from small local industry. Furthermore, foreign-owned multi-brand stores will be allowed to open only in cities with more than 1 million people, which applies to 53 cities based on this year's census.
When it comes to mono-brand retailing, full foreign ownership will be allowed only if the products sold in the store are of a single brand, and this brand is the same as the name used in international markets. Again, the retailer would have to source at least 30 percent of the products from small local industry.
The retail reform was repeatedly delayed because it faced stiff opposition from small retailers. There are fears that it will trigger the opening of hundreds of foreign-owned supermarkets and lead to the demise of countless small stores, destroying the income of millions of Indians.
On the other hand, proponents of the reform argue that it will bring in badly needed foreign investment, which has been meager in the last years. The most upbeat supporters of the reform predict that it will create up to 10 million jobs in three years. They are also confident that it will vastly improve the Indian supply chain, to the benefit of suppliers as well as consumers, and that it will help to reduce inflation, which is putting heavy pressure on Indian consumer spending.
The decision to open up the market was awaited with particular trepidation by the likes of Wal-Mart, Carrefour and Metro. They have all moved into India but only on a small scale with cash-and-carry stores. The changes also mean that some of India's most indebted retail groups may try to sell stakes in their most established formats to foreign investors.
The reform was adopted by the Indian Cabinet last week but permits will still have to be delivered by Indian states, some of which have already expressed their reluctance. It was widely regarded as a bold move by Manmohan Singh, India's prime minister, to quell criticism of political apathy since the government has been mired in a series of corruption scandals.
India's total retail market is estimated at $450 billion to $600 billion, but less than 10 percent of that is organized. The Boston Consulting Group recently estimated the organized part of the market at $28 billion, equivalent to about 7 percent of the entire retail market, but predicted that it would expand to a share of 21 percent in the next decade, amounting to $260 billion.