India: Bring on the Wal-Mart greeters

The Indian government has announced economic reforms that would allow Wal-Mart retail stores to enter India in a bid to increase foreign capital flows and rebuild the current government's tarnished credibility on the subcontinent and abroad. 

The move Friday ends three years of policy inertia and headlines dominated by corruption, which has seen the economy in India plummet from nearly 10 percent growth to under 6 percent. The ruling Congress Party is now trying to move the conversation away from the subject of corruption by demonstrating it can still get major initiatives done.

“The sudden push for reforms seem to be born out of desperation,” says Arun Jethmalani, the managing director of ValueNotes, a market intelligence and consulting firm based in Pune, India. “The [economic] situation has gotten so bad in India, that some people in the government are finally realizing that we have to do something immediately.”

Under new rules, a previous ban on foreign investment in multi-brand, big-box retail stores like Wal-Mart has been relaxed to allow foreign shares of up to 51 percent. 

The changes will also open the door for single brand foreign investors such as the Swedish furniture store IKEA, by allowing investors to own outlets outright without needing local partners. Restrictions will also be relaxed on foreign investment in airlines, broadcasting, and power exchanges.

India’s Prime Minister Manmohan Singh argues the reforms will boost the economy by injecting foreign capital and introducing foreign expertise in supply-chain management. 

However, the opening of big-box retail to foreign investment is unlikely to be applied nation-wide. Prime Minister Singh is leaving that up to individual states to decide whether to implement. Political observers consider this a clever move by the prime minister, considering the push-back from the leaders of many states against central government-led changes and federal direct investment (FDI).

With many states still hostile to FDI and politics mired in bureaucratic corruption at nearly every level, ValueNotes' Mr. Jethmalani believes it will take time to see any real change.

“On one level the government makes a policy, but on the ground it’s not so easy,” says Jethmalani. “It will happen. But this is India; nothing changes quickly.”

Many investment analysts, however, point out the significant upside to the move.

“The government standing firm on its commitments combined with sensible steps on the fiscal side should help boost capital flows,” says Nick Paulson-Ellis, India head for Espirito Santos Securities. “Federal direct investment is needed to allow India’s $450 billion retail market, of which only 6 percent is organized, to grow over time. Introducing logistics, supply chain, and cold storage expertise and investment are critical to reducing the criminal levels of wastage in the farm-to-fork chain.”

India is still a nation of mostly mom and pop stores and small farmers heavily controlled by the government and middlemen. This absence of a streamlined system leads to nearly 40 percent of fruits and vegetables rotting before they reach the consumer. On the other hand, the system employs millions, leaving critics to warn that rapid changes may displace the livelihoods of many. 

Mr. Paulson-Ellis, meanwhile, cautions that while FDI is important, the most critical issue the government has proposed is cutting fuel subsidies. The reduction in fuel subsidies will lead to a 12 percent increase in the price of diesel for Indian drivers and the millions of people and companies who use generators to ensure 24/7 power. Though the move may be unpopular, many economists believe the cut in subsidies – which mainly benefit the wealthy and middle class – is essential. 

“Addressing the fiscal deficit is of far greater current importance than any FDI reforms,” says Paulson-Ellis. “Without it there is likely to be a 5.8 percent fiscal deficit and near certain downgrade to a sub-investment grade.”

Gurcharan Das, an Indian economist and author, believes the changes are going to improve the economy far quicker than people realize.

“There are a number of states where joint ventures with Wal-Mart are already operating,” Mr. Das says. “In states like the Punjab and Rajasthan they have already done the groundwork so it will not take long for the new reforms to take hold.”

Das believes the coming of modern trade in big box stores like Wal-Mart will bring needed transparency by cutting out the middleman and not allowing politicians to so easily manipulate the market.

Paulson-Ellis points to another quick impact of the policy changes: changes to the rhetoric in the country. 

“In two days, an embattled government has changed the debate from rampant corruption – the latest involving billions of dollars in coal mine allocations,” says Paulson-Elllis.  “An opposition that was up in arms is seen to be regrouping.”