Indian retailers fear liberalisation
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Indian retailers fear liberalisation

According to new rules, overseas firms setting up wholesale operations in India need no longer seek FIPB's permission.

india Updated: Jan 28, 2006 18:56 IST

Indian retailers have expressed their fears about the effect of liberalisation. According to new rules, overseas groups setting up 100 per cent-owned wholesale operations need no longer seek permission from India's Foreign Investment Promotion Board (FIPB). Foreign retailers can set up wholly owned wholesale trading operations in India for several years, but few, apart from Germany's Metro, have managed to negotiate the FIPB's regulatory hurdles.

Wal-Mart lobbied for a broad relaxation of restrictions on retail investment during a meeting last year with Indian ministers. The UK's Tesco, has a non-retail presence in Bangalore with a big service centre. Late last year Sir Terry Leahy, chief executive, made his first visit there, amid reports of the company eyeing the Indian market.

However, a report in The Financial Times said Tesco has denied any plans to open up in India and that Sir Terry had not had any wider meetings when he was there. "We look at lots of countries but we are focused on where we have an existing presence for now," it said.

Under the new rules, the government said it would continue to disallow foreign direct investment by retailers of multiple brands, keeping out the big hypermarket groups and discounters.

But Kishore Biyani, chief executive of Pantaloon, India's biggest retailer, warned of the likelihood that foreign supermarket operators would try to bend the rules by setting up wholesale operations that would eventually cater to individual shoppers.

"I am worried because (foreign retailers) can always come in via the cash and carry route and convert into retail when rules permit in say two years," said Biyani, claiming India was "on the path" towards full deregulation. "This (cash and carry rule) gives (foreign retailers) a two-year start to prepare for retailing."

The Indian government also announced it would allow retailers selling a "single brand", such as Louis Vuitton boutiques, to own 51 per cent of their operations, instead of the earlier system of franchise agreements.

Biyani said his response to the cash and carry opening up would be to develop further his Pantaloon group. The company has 2.75m sq ft of retailing space, which will be expanded to 5m sq ft by December this year. He said raising the FDI cap for single-brand retailing would not trigger "major inflows of capital" because this was a small segment that was "not relevant to most of India" and the likes of Reebok and Nike had already entered via franchises.

Rajeev Malik, an economist at JP Morgan, told the FT: "India's economic reforms remain a story of incremental changes at a glacial pace, and continue to reflect the fear of fully liberalised foreign investment in India's retail sector."

According to Damian Vernet, Louis Vuitton general manager for Middle East and India, the new rules would "not have much operational impact" for luxury brands and a bigger challenge would be to continue finding suitable locations for new stores. Because of the FDI ceiling, foreign retailers of single brands will continue to need local partners.

Biyani hopes there would be tight conditions limiting the number of outlets, controlling their location and barring below-cost pricing strategies.

First Published: Jan 28, 2006 18:56 IST