Last week’s announcement to allow foreign direct investment in sectors such as aviation, retail, power generation and broadcasting have the potential to affect the kind of change that the first round of economic liberalization brought about when Indians were introduced to MTV for the first time ever in their lives in the early nineties.
An important step to further liberalize the Indian economy bodes well for investors and for corporate companies alike.
While India's ailing aviation and power sectors have been looking for a much-needed boost for a long time now, it's the changes in retail and broadcasting that will be much more visible and also symptomatic of a country still embracing the "consumer culture" of the west and will now be embodied by "multi-brand" stores like Wal-Mart, Carrefour and whoever else wants a piece of the fat Indian middle-class wallet.
On the other hand, the tendency of the middle class to dispose their rising disposable incomes will now find a wider range of options to do just that.
The impact on retail
As far as retail is concerned, here’s how existing regulations are stacked up and how the new regulations can potentially change the retail landscape.
Till recently, FDI in retail, except single-brand product retailing (conditions attached), was not allowed. 51% investment in a single-brand retail outlet was permitted in 2006. FDI in multi-brand retailing was not.
While 100% FDI was allowed in singe-brand retail from December 2011, with last week’s announcement, 51% FDI is now permitted in multi-brand retail with caveats, and with individual states who oppose the move free to not take it up.
Industry experts and commentators have hailed the move as a positive step for the sector. According to President of Wal-Mart India and MD and CEO of Bharti-Wal-Mart, Raj Jain, "This policy will allow us to connect directly with the consumer and save them money. We are willing and able to invest in back-end infrastructure that will help reduce wastage of farm produce, improve the livelihood of farmers, lower prices of products and ease supply-side inflation."
Such investments as the ones that Jain talks about will largely be in the back-end, in technology, supply-chain, logistics, storage infrastructure, real estate and human resources. Public procurement and distribution systems, poor efficiency and average consumer experience are all ills that will give way to global best management practices.
Investments in storage transportation and infrastructure, technology and supply-chain operations will all help to benefit both the foreign brands that will get access to local market knowledge and an increased consumer base while Indian companies will also benefit from overall increased efficiencies.
In terms of job creation, the effect can already be seen with Bharti-Wal-Mart collaboration which has joined hands with state governments to open training and development centres. To date, over 10.400 students have been placed in various jobs either in supervisory roles or as floor assistants and sales assistants.
According to MD-Retail Services of Jones Lang LaSalle India, Pankaj Renjhen, the increased flow of capital, if used effectively, will benefit both the farmers and the consumers. Farmers will benefit from the better price indexing and direct selling to the retailer. The consumer, in addition to having a better shopping experience, will benefit from the competition and the resultant reduced prices.
Renjhen adds, “It would be prudent to encourage FDI in retail further. Of course, sufficient consideration should be given to the interests of SMEs, farmers and consumers while finalizing this decision.”
For companies such as Wal-Mart, this means they can take longer-term bets and invest in stores, which will be sustainable over time. For real-estate developers, the government’s decision is an invitation to set up quality shopping centres and invest in an asset class with a clear vision to long-term profit.
Rouhan Sharma is Assistant Site Editor - Overseas Markets with Morningstar.com, our sister US website.