Why India pulled the welcome mat for Wal-Mart

Intense protest prompted India to shelve plans this month to allow box stores like Wal-Mart. But many say the retail sector is backward and needs the jobs and investment such stores would bring.

The Indian government's recent plans to open the retail sector to foreign big-box stores like Wal-Mart was met with such vehement pushback from people across India that the plans had to be shelved earlier this month.

Unlike in the United States, where more than 80 percent of Americans shop at supermarkets and chain stores, most Indians still shop in kirana, or tiny mom and pop stores. The 15 million small retail outlets here employ tens of millions of people.

While India has welcomed many Western companies under two decades of economic liberalization, the move to megastores has proved to be a tough sell.

The idea of driving long distances on bad roads, battling for a parking spot, and choosing between hundreds of brands perplexes many consumers who say they are happy with the current small-and-local model. But the domestic resistance frustrates Indian technocrats and business elites who are focused on keeping India's growth rates high.

While Wal-Mart worries many shopkeepers, some are banking on customer loyalty and shopping habits to save them.

Rajiv Malik owns a kirana in the alleyway of a middle-class neighborhood in Delhi. His shop, a mini-version of Wal-Mart, offers everything from shampoo and vegetables to underwear and plastic beach balls.

"Over half of my customers buy on credit, and I will deliver anything from a loaf of bread to a few eggs," says Mr. Malik, who keeps track of purchases in a big, yellow notebook. "I don't think that Wal-Mart will be able to provide this kind of service."

Ilyas, who goes by one name, plays dual roles as a middleman buying fruits and vegetables from whole-salers and running a roadside stand. Like Malik, he thinks he can compete. "Even though big stores may be able to sell for less, they can't keep their fruits and vegetables as fresh as mine," he says. "My customers are willing to pay more for quality."

Job jitters

While Malik and Ilyas may not seem concerned about the coming of the big shops, millions of others worry that they could lose their jobs. Responding to that anxiety, opposition parties blocked the government's decision to allow foreign, multibrand retailers, such as Wal-Mart and Tesco.

"The economy as a whole can only gain if the presence of foreign retailers creates more opportunities for the manufacturing sector, as opposed to being threatened by it," says Rajeev Chandrasekhar, one of the members of Parliament who blocked the measure.

The failed resolution left economist Rajiv Kumar, the secretary-general of the Federation of Indian Chambers of Commerce and Industry, fuming.

"Those who have opposed the entry of foreign direct investment [FDI] in multibrand retail have done this without recognizing that this is a sector that remains backward, dominated by a cash economy, with all its features of nonaccountability, and has poor to horrible working conditions," he says.

Prime Minister Manmohan Singh has argued that opening the sector would create 10 million jobs and cut India's rising food-price inflation.

Currently, 40 percent of fruits and vegetables rot before they can be sold due to a lack of cold-chain systems or refrigeration from farm to store. Under the government's plan, multinationals would be required to invest $100 million over five years, and at least half of that must go to building a cold-chain system and rural infrastructure. Supporters argue the investments could help provide food to millions of people in a country racked by malnutrition.

Rural Indian shoppers, however, would not be walking up to a big-box store in the countryside. According to the current guidelines, multinationals are not allowed to operate in cities with a population of fewer than a million people.

Middleman squeeze

As for jobs, Mr. Kumar argues that small retailers won't be out of work if Wal-Mart comes because the unorganized retail sector is set to nearly double in the next 10 years by simply keeping pace with growth.

Analysts say it's the middlemen like Ilyas who are likely to be affected most, as the multinationals will deal directly with the farmer. But this could lower prices for the consumer as there would be less nonvalue-added cost involved.

Both Kumar and Mr. Chandrasekhar agree that the only way all the stakeholders will support the FDI in retail is after thorough analysis and serious public discourse.

"Foreign ownership of retail in India is ... a very disruptive policy," says Chandrasekhar. "There may be winners, but there are clearly going to be many, many painful losers. As long as a policy implies pain and loss to certain segments of our society and people, it will never become a reality."

While opponents succeeded in stopping the plan for now, some of them, like shopkeepers Malik and Ilyas, say the coming of the big-box retailers is inevitable.

Malik is certain the 50 percent of his clientele who buy on credit will still choose his store. Ilyas says he's ready to adapt to the changing role.

"When Wal-Mart comes it will not affect me," says Ilyas. "I'll play a bigger role in the supply chain and will integrate myself with Wal-Mart."

Ilyas may be changing roles sooner than later: The prime minister said recently that he hopes to pass the FDI policy in retail next year. "There was inadequate preparation, and some partners in the coalition developed cold feet," Mr. Singh told Bloomberg. "But I can assure you, India remains committed to a system of regulation that is supportive of enterprise, and we will do everything to encourage foreign investment."