The Cabinet’s decision to let states take a call on whether to allow foreign direct investment (FDI) in multi-brand retail may slow foreign investors’ entry into India, say analysts and industry representatives. Even if a state favoured foreign investment in retail, what would happen if the current regime was voted out in the next election? Would a company have to shut shop in the state? Would it lead to law and order problems? These are some of the uncertainties keeping investors away.
“From the perspective of foreign retailers, it would be stupid to invest under these rules. Those already here are a worried lot,” Arvind Singhal, chairman, Technopak Advisors, told Business Standard. On foreign retailers being at the mercy of state governments, he said, “It would be a limiting factor for chains while taking crucial business decisions.”
With elections scheduled in 16 states/Union territories by 2014, retail chains would need to assess the political pros and cons before planning a strategy for India. As of now, only 10 states and Union territories (Delhi, Maharashtra, Haryana, Rajasthan, Uttarakhand, Andhra Pradesh, Assam, Manipur, Daman & Diu and Dadra Nagar Haveli) have clearly stated they favoured FDI in retail.
An analyst report by JP Morgan termed the retail FDI policy a “sentiment-positive” development for existing retailers, including Pantaloon Retail. However, it added, “Given the state-level discretion involved here, the company may have to consider separate alliances or partnership structures.”
Brokerage firm Religare also raised concern over the role of states in the process. “Given the state-wise approvals required, we believe foreign retailers would go slow, in terms of entering India,” stated a Religare report. The report pointed to a scenario in which a particular government in a state allowed FDI, before being voted out of power. In such a case, there was no clarity on whether the subsequent government would have the right to roll back the decision, it added.
The key challenge for Indian retailers would be to restructure existing businesses to meet the stringent norms, stated a Macquaire analysis. “The retail sector ails from poor infrastructure, high real estate costs, an inefficient supply chain and complex taxation and rigid labour laws. Given the opposition from several state governments, we believe FDI would be gradual and any benefit would be realised only in the long term,” the report stated.
Concern is also being raised over possible violations of bilateral investment treaties.
Yesterday, Bharatiya Janata Party spokesperson Prakash Javadkar had said India had bilateral investment agreements with 82 countries. “The basic feature of these bilateral treaties is these accord national treatment to foreign investors. The effect of this provision is India cannot put a condition on foreign investors that is not applicable to domestic investors,” he had said. This means if there are no restrictions on local retail chains, restrictions on foreign chains by states would be declared void by courts.
While one may move court over the issue, it is unlikely foreign retail chains would go to any of the ‘hostile’ states, said a government official. “When the Centre decided to leave the implementation of retail FDI to states, the issue of bilateral treaty was discussed and factored in,” he added.
When asked whether state-wise rollout of FDI in retail would pose a challenge to foreign investors, Rajan Bharti Mittal, vice-chairman and managing director of Bharti Enterprises, said the company would present its case to all states, irrespective of their current stand. Refusing to term the issue a major challenge, he said, “One has to go to states anyway for obtaining as many as 26 licences before opening a store.” Won’t the state clause be a limiting factor for foreign investors, especially if the ruling party lost in the next state election? “We don’t expect any over-turning…so many reforms have been introduced at the Centre under different regimes, but anything that sovereign has not been taken back,” he answers. When reminded Reliance Retail stores in Uttar Pradesh had to be shut a few years earlier due to law and order problems, he said, “That was sporadic, and such things can happen any time.”
Walmart has signed a 50-50 joint venture with Bharti for cash-and-carry business and back-end support to Easy Day stores. The two are expected to extend the venture to front-end retail in the coming days.