India’s New Reformist Party Turns Against Supermarket FDI

The capital city’s newly-elected reformist government – the Aam Aadmi Party (AAP), which has won praise across the planet for its stand against corruption, has exhibited distressing populist roots by announcing a ban on foreign supermarkets in Delhi.

Economists say the AAP’s decision to scrap foreign direct investment in retail chains could be problematic because Delhi is the most important retail market in the country in terms of per capita income. For international retailers, the city offers the ideal entry point to start their India journey. With a sizeable community of aspirational consumers with high disposable incomes, markets in metropolitan cities such as Delhi, Mumbai and Chennai are high on the list of global retail titans looking for an India foray.

The neophyte party’s stance is also a blow to the ruling Congress-led United Progressive Alliance coalition, which has been scrambling to attract overseas investment and resuscitate India’s capital-scarce economy ahead of the general elections in April-May.

Following the AAP’s dramatic victory in December, which surprised even itself, its founder and new chief minister Arvind Kejriwal, pledged to scrap the state's existing retail policy during his campaign. But when he followed it up to overturn erstwhile Delhi chief minister Sheila Dixit’s pro-FDI policy stance, he stunned policy pundits and the corporate sector, with industry minister Anand Sharma hinting that India isn’t a “banana republic” in which policies can be reversed abruptly.

In September 2012, the central government authorized foreign investors to buy 51 percent of India's multi-brand retail chains, but left its implementation to the states. As a result, only 11 out of India's 28 states opted for rolling out the policy to support the entry of foreign supermarket chains such as Wal-Mart Stores Inc. of the US and Tesco Plc of the UK. However, after AAP's withdrawal, that number has whittled down just 10.

The new party’s opposition to foreign retailers augurs ill for the capital city’s economy, say market analysts. An assessment by industry body PHD Chamber of Commerce estimates that the overall retail sector in the Delhi-NCR region has the potential to attract FDI worth US$50 billion over the next five-six years.

Economists are concerned that the ban will not only dampen investor appetite, but also has the potential to throw the country’s FDI policy in retail into a tailspin.

“Allowing overseas investors to fund high-growth sectors can have a multiplier effect on job creation and income generation,” said investment consultant Deepak Sahi of Reliance Retail. “To unilaterally annul a decision taken by a preceding government without consultations with stakeholders sends out wrong signals to investors and sets an unhealthy precedent.”

Prospective foreign investors, lured by the country's US$500-billion retail market, are already underwhelmed by the lack of a political consensus over allowing FDI in supermarkets. Stringent sourcing norms and a requirement that companies seek permission from local state governments before opening stores have further disenchanted them.

Currently, foreign retailers are allowed to set up shop in only cities with populations of more than one million. Faced with policy loopholes and India’s slowing economic growth, foreign retailers are awaiting a change in government to bring greater policy clarity. In December, British retail chain Tesco announced the first significant investment in multi-brand retail, tying up with Tata group to invest US$110 million to open supermarkets in southern Karnataka and Maharashtra.

Market analysts point out that India already fares abysmally in the global retail ranking order with organized retail in the country’s total retail trade just over 4 percent. This compares poorly not only with the 66 percent figure for Japan, but also with China's 20 percent, Malaysia's 55 percent and Indonesia's 30 percent.

The issue of FDI in supermarket chains has always been a politically fraught one in India. After the Congress-led coalition government decided to liberalize FDI policy in retail, its key ally the Trinamool Congress withdrew support to the ruling UPA coalition increasing the latter’s political vulnerability. The right-wing main opposition Bharatiya Janata Party has also been averse to FDI in multi-brand retail.

But despite stiff resistance from domestic retailers and political parties, who fear that the entry of global supermarket chains will cause mass job losses in a sector dominated by mom-and-pop stores, the policy was pushed through by the UPA.

According to a Boston Consultancy Group finding, nearly three to four million direct jobs would be created while another four to six million indirect jobs would be available in logistics, contract labor, housekeeping and security staff in stores with the arrival of multi-brand chains. For consumers, this would translate into a saving of 5-10 percent in specific categories leading to an aggregate savings of US$25-30 billion in various taxes. For farmers too, the earnings would translate as 10-30 per cent higher remunerations.

The benefits of the system percolate down to food retailers who can buy directly from farmers by eliminating middlemen, pushing up farmers’ profits, shrinking time from farm to plate and reducing food wastage. According to the Food and Agriculture Organization, globally one-third of the food produced is wasted, costing the world economy as much as US$750 billion. India, according to an FAO report last year, is a significant contributor on account of both pre- and post-harvest wastage in cereals, pulses, fruits and vegetables due to paucity of storage. Agriculture minister Sharad Pawar recently told Parliament that agriculture produce to the tune of about US$ 9 billion –40 percent of the total produce—is wasted every year.

Now that it has ambitions to go national, critics say, it is time for the AAP to spell out a coherent economic vision for the country, rather than indulge in regressive policies. No doubt the party’s anti-corruption platform, focus on decentralized and transparent governance have found resonance amongst the public, including professionals and entrepreneurs.

But slamming doors on Walmart and Tesco, even on the unsubstantiated ground that they will lead to the decimation of family-run stores, and cause rampant unemployment, is patently anti-people. Instead, a clear policy statement on its approach towards fiscal consolidation, subsidies, environmental clearances, land acquisition, labor laws and the promotion of new agricultural technologies is the way forward. The party’s own success is linked to job creation, which cannot happen without an environment in which enterprise thrives.

(Neeta Lal is a New Delhi-based senior journalist. Email him at neetalal@hotmail.com)