India’s Closed Shop. Excessive regulation turned Delhi’s retail opening into a failure
October 18, 2013 Leave a comment
India’s Closed Shop. Excessive regulation turned Delhi’s retail opening into a failure.
Updated Oct. 17, 2013 5:37 p.m. ET
Wal-Mart WMT +0.24% last week announced it would close its retail outlets in India and part ways with local partner Bharti Enterprises. The American company says it can’t make a profit due to a government requirement that 30% of inventory be sourced from local channels, a rule that doesn’t apply to Indian firms. Wal-Mart’s exit means not a single multinational is taking advantage of India’s decision last year to allow foreign retailers to own 51% of joint ventures.This outcome is frustrating because the political battle to crack open the retail business to foreign competition has been so bruising. Prime Minister Manmohan Singh first proposed to let foreign multi-brand retailers own 51% stakes in joint ventures in 2011. Protectionists in the opposition Bharatiya Janata Party and Communist Party of India mounted a strong attack, and Mr. Singh’s ruling Congress Party backed down in early 2012.
Later in 2012, Mr. Singh tried again, and this time Parliament passed a law permitting foreign investors to hold a majority stake in supermarkets. Yet the reform was weighed down with onerous requirements. In addition to the 30% local sourcing requirement, foreign firms are allowed in only if they invest at least $100 million, with 50% of that going to back-end infrastructure such as storage and warehouses. Foreign retailers can only enter cities with populations of more than one million, and local governments can veto any proposed store.
Wal-Mart will still operate 20 wholesale stores, on which regulations are more lenient. But its inability to open supermarkets will harm poor households that stood to benefit most from the higher quality, increased choice and lower prices of a more competitive market.
Modern distribution chains would also do wonders for a country with dismal farm-to-table transportation. An estimated 40% of food in India rots or is siphoned off by corrupt hands before reaching consumers.
Finance Minister P. Chidambaram has adopted a sour grapes attitude, calling the world’s largest retailer a “speck” in India’s market. “If Wal-Mart is still not satisfied, so be it,” he says.
With elections early next year, Indian politicians are unlikely to fight for more liberalization of the retail trade anytime soon. Investors are left to wonder how much more bad economic news it will take before Delhi gets serious about reform.
About bambooinnovator
Bamboo Innovator 