Market Analysis

India’s Foreign Retail Ping Pong

India’s government announced sensible economic reforms Friday. But it remains to be seen whether they’ll go into effect.

In the world’s most populous democracy—India—playing politics is commonplace. And it seems another political turn has taken place regarding opening the nation to foreign retailers.

Friday, Prime Minister Manmohan Singh’s government announced it would allow foreign retailers to take a 51% stake in Indian subsidiaries and establish big box retail stores and distribution centers. Foreign airlines will be permitted to take up to a 49% stake in Indian carriers. This modest opening of the Indian economy would represent a markedly positive step for the country. But there is a caveat.

You see, Friday’s announcement wasn’t so much new news as it was a reintroduction. About a year ago, Singh’s government had announced a similar policy change. However, the prior iteration was repealed shortly thereafter as it was vehemently opposed by small shop owners. It’s estimated there’s one store for every 10 citizens, meaning they have a considerable voice in the political forum. These small shop owners worried their roughly 90% share of Indian retail would evaporate in the face of big box store competition—which may well be the case. We doubt this group will do a radical volte face and drop their opposition only one year later.

But Singh’s government apparently has a plan for that, too. This time, state governments will be tasked with deciding whether to implement the policy—essentially punting the charged debate from New Delhi to regional capitals. Which means it could easily wind up embroiled in bureaucratic morass nearly immediately. Meaning we’d perfectly understand if businesses took notice of this announcement, but didn’t immediately launch fact-finding missions.

The simple fact is Singh was elected on a platform of economic reform—greater openness targeting improved productivity, output and general economic conditions. But reforms have been very slow in coming. And yet, the reforms are no less needed.

In a recent World Economic Forum ranking, an Indian business consortium (the CCI) noted viable infrastructure—or the lack thereof—is a critical issue in India impeding economic development. And it’s a factor that keeps important things like food, clean water, medication and medical care and the like from being more broadly disseminated. Of course, there’s no easy fix. But realistically, the lasting kinds of change—those that have already worked in reducing poverty and associated issues—tend to be more often brought by economic advance.

If large foreign retailers entered the Indian market today, one thing they’d likely have to do is improve infrastructure. And in addition, they’d likely bring economies of scale to bear. Not to mention jobs, lower prices and the like. Those factors, over a long period of time, could help improve India’s standing.

So let’s hope Friday’s announcement is, in fact, as significant a turning point as some presume and not merely another volley before economic reforms are reversed again.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.