Retail stocks slip as hopes of foreign investment fade

The share price of the country’s two large retail companies, Pantaloon Retail and Shoppers Stop, have come under pressure, as the outcome of the Assembly polls in Uttar Pradesh has cast a shadow over the Congress-led ruling government’s ability to push through Foreign Direct Investment (FDI) in the multi-brand retail segment.

Pantaloon Retail fell 3.33 per cent and Shoppers Stop declined 4.02 per cent on the Bombay Stock Exchange (BSE) on Wednesday. The former has declined 10 per cent in two days.

It was believed the Manmohan Singh government would pile pressure on regional parties to support FDI in multi-brand retail if it fared well in the UP polls. However, the Samajwadi Party (SP) received a decisive mandate and the Congress will not play any role in government formation in the state. The SP has already opposed FDI in retail.

“The market feels the chances of the government allowing FDI in multi-brand retail have reduced. Earlier, it was believed SP would need Congress’ support to form the government and, in return, it would support the latter in passing some key legislations, which lack political consensus. However, now there is no reason for SP to support Congress,” said Abhishek Ranganathan, retail analyst at MF Global Sify Securities.

On December 7, the government had suspended its decision to allow 51 per cent overseas ownership of multi-brand retail stores, following protests by opposition parties and some allies. The Prime Minister had then said he would make a bid to revive the proposals after the state elections.

FIIs are, however, not pessimistic about the government pushing through reforms after the UP elections.

A Morgan Stanley report notes Mayawati’s Bahujan Samaj Party, after being routed in UP, might support the Congress to avoid Lok Sabha polls in the state. That might lend some support to Congress, but it still does not make the Congress-led UPA government strong enough to push through desperately-needed reforms.

Goldman Sachs, in its analysis of the elections, said, “We think the results will not provide the political space or the confidence to push through unpopular reforms. The weakening of Congress and better outcome for the Bharatiya Janata Party (BJP) in the polls will see stormy Parliamentary sessions and Bills will take much more time and effort to be passed.” Besides UP, Congress also lost in Punjab and Goa, where BJP will be forming the government.

Morgan Stanley and UBS believe since Lok Sabha polls are still 24 months away, the government may seize the opportunity to undertake reforms aggressively. “The government sacrificing fiscal consolidation (with a populist Budget) to regain political support is also unlikely, as the resultant higher inflation is, arguably, a worse political economy scenario,” UBS said.

Citi says a strong showing by the BJP in the elections could actually encourage markets to become more upbeat about the 2014 elections “since the BJP-led coalition has a better history of economic reforms (when in power between 1999 and 2004) than the Congress”.