India's government approved plans to allow foreign retailers to open outlets that sell more than one brand, opening up a $505 billion market to such companies as Wal-Mart Stores Inc. (WMT) and Carrefour SA. (CA)
The government said yesterday that overseas companies must put half of their investment in infrastructure such as processing, manufacturing, storage, warehouses and packaging.
"India is a big opportunity, of that there is no doubt," Arun Kejriwal, director of advisory firm Kejriwal Research & Investment Services Pvt. said by phone. "We have the world's second-largest population, we have a fairly large middle class, so we become an attractive destination for any sort of organized retailing."
Yesterday's announcement came after political opposition led the government in December to reverse a decision to allow overseas companies to own 51 percent of Indian retail stores. Global retailers have sought to enter the world's second-most populous country to tap a market that's estimated to grow to $725 billion by 2017, from $505 billion in 2012, according to Technopak Advisors Pvt.
Calling it an "important first step" for India to further liberalize the retail industry, Wal-Mart said it is willing to invest in infrastructure that will help lower product prices, reduce wastage of farm produce and ease supply-side inflation.
Infrastructure Investment
"We are grateful that the government has realized and appreciated the value that we will bring to strengthen the Indian economy," Raj Jain, president of Wal-Mart India, said in an e-mailed statement yesterday.
Foreign-funded outlets are only allowed to set up in states permitted by the local governments and can only be opened in cities with a population of more than one million people, according to yesterday's statement. In states that do not have cities of more than 1 million people, the state government can choose where to allow stores.
Indian retailers including Pantaloon Retail Ltd. (PF), the country's largest operator of supermarkets, surged in Mumbai yesterday after a report that the government may decide to allow foreign investment in multibrand retail. Pantaloon rose 7.1 percent to 157.90 rupees, the most since June 6, while Shopper's Stop Ltd. (SHOP) added 1.2 percent and Trent Ltd. (TRENT), which has a franchise agreement with Tesco Plc (TSCO), climbed 3 percent.
Local Benefit
Indian companies may benefit from looser rules because the action could encourage partnerships with international businesses. Foreign investment will help ease fundraising concerns for Indian companies that have been "bleeding money," said Arvind Singhal, chairman of Technopak Advisors.
Shoppers' Stop will consider teaming up with a foreign partner to expand its hypermarkets as it needs global technology, sourcing and a large amount of funding, Govind Shrikhande, managing director at Shoppers Stop, said by phone.
Foreign companies are currently permitted to invest in supply chains and wholesale stores, which sell to local retailers and businesses. In January, India allowed overseas companies full ownership of stores selling a single brand, letting the likes of Starbucks Corp. (SBUX) and Ikea operate without a local partner. Ownership had been limited to 51 percent.
The government's last attempt to open the industry to overseas investment was met with protests from the opposition and its allies, which forced repeated adjournments of parliamentary proceedings. Prime Minister Manmohan Singh pledged in December that he would urge the easing of restrictions in an effort to boost the country's economic growth.
Singh has a target to narrow the budget deficit to 5.1 percent of gross domestic product in the 12 months ending March 2013 from 5.8 percent a year earlier. Asia's third-largest economy grew 5.5 percent in the three months ended June 30 after expanding 5.3 percent in the previous quarter, the least in three years.
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