Govt hopes job logic will coax left on retail | india | Hindustan Times
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Govt hopes job logic will coax left on retail

Developing the $8.5 billion retail sector carries huge opportunities and huge risks.

india Updated: Mar 16, 2006 17:03 IST

Nandan Piramal is a harried man. As vice-chairman of a leading Indian retailer, he can't find the technology to ensure farm products stay fresh on their way from the fields to his stores.

Food retailers in India are mainly family-run businesses too small to have created much of a market for a home-grown refrigerated transport industry.

Piramal, of Piramyd Retail Ltd, says one solution would be to tap into foreign expertise. Yet, there's a hitch -- foreign investment in Indian retail is heavily restricted.

"We don't consider foreign direct investment as too much of a threat," he said. "I think it will add to the pie instead of eating into the pie."

Piramal's situation is one reason the ruling Congress-led coalition wants to open retailing to foreign investors. It has so far shied away due to opposition from its communist allies, avoiding the issue in last month's annual budget, but analysts say it will tackle the issue once state elections in May have run their course.

A small step was taken in January -- allowing single-brand foreign firms to own 51 percent of retail joint ventures. Until then, these brands depended on franchisees to sell their wares in Asia's third-largest economy.

But multiple-brand firms such as Wal-Mart Stores Inc and Carrefour are still barred.

Jobs galore

Developing the $8.5 billion retail sector carries huge opportunities and huge risks. Economists say it has a clear link to overall economic growth and thousands, if not millions, of jobs stand to be created to make up for those lost through competition.

The government expects foreign investment in retail to make India the factory to the world and push growth beyond its current annual rate of 8 per cent.

Analysts said chains like Wal-Mart and Carrefour will tap local vendors once they set up shop, to ensure better margins in a high volume market with a population of more than a billion. This may also prompt them to export to their stores abroad.

"The global retailers taken together buy about $60 billion of goods each year from China for exports," said Alok Ray, economics professor at Indian Institute of Management Calcutta.

"Contrast this with India, where less than $1 billion of exports are accounted for by global retailers."

India is on a drive to boost exports, which form just 10 per cent of the $700-billion economy. They are a key growth driver in years when domestic demand, driven by rural consumption and dependent on capricious monsoon rains, is sluggish.

Political quagmire

But there are roadblocks to opening a part of the economy in which tiny shops and bazaar stalls have 97 percent of the market and which the government's communist allies, facing elections in their stronghold states in April and May, want protected for ideological reasons.

The ruling Congress party and the communists are locked in an electoral battle in two of the five states due for polls and Congress does not want to open retailing beforehand and hand the left a stick with which to beat it.

"Opening the single-brand retail was the pebble and the rock will follow," said Mahesh Rangarajan, political commentator and analyst. "The budget was a quiet one and the government took care it offended no one. Particularly with the elections, they would not be wanting to raise the left's hackles too much."

Analysts say the communists oppose the move on the basis that foreign investment is not good for the country's development rather than because it might threaten jobs, as labour unions have little influence among retail employees.

So the government hopes they will come around on the potential for new jobs and higher rates of growth.

Consultancy firm KSA Technopak expects retailing to employ 2.5 million people in the next five years as it expands into a $45 billion industry. Another 2-3 million people would be indirectly employed in manufacturing, packaging and transport.

The government could copy China and first partially open the sector, giving local players time to gather strength before removing all the caps, analysts say.

In fact, the government does plan to cap foreign money at 26 or 51 per cent, to ensure foreign firms have a local partner.

This may also silence local retailers who say they are not yet strong enough to face the might of foreign giants.

"Being closer to the consumer, small retailers can reinvent themselves and stock products which have high frequency like fruits, eggs and milk and also cater to the top-up needs of personal care," said Purnendu Kumar, Principal Consultant with KSA Technopak.

Small retailers say they will also retain some advantages.

"The foreigners will have shops in big malls and not many of my customers have cars to load all their groceries," Mussaddi Lal said at his shop in a residential area of New Delhi. "Moreover, we deliver at home for free."