States’ dissent raises hurdles for retail FDI5 min read . Updated: 28 Nov 2011, 01:18 AM IST
States’ dissent raises hurdles for retail FDI
States’ dissent raises hurdles for retail FDI
New Delhi/Chennai: Mounting opposition in several states and by major political parties to the government’s decision to allow greater presence of foreign firms in retail shows the key reform measure announced last week may be headed for hurdles.
Tamil Nadu chief minister J. Jayalalithaa in a letter to Prime Minister Manmohan Singh on Sunday expressed her opposition and announced that she will not allow global multi-brand stores to set up shop in the state.
On Thursday, the cabinet allowed 100% foreign direct investment (FDI) in single-brand retail, up from 51% earlier, and put a 51% cap in multi-brand retail with riders. Earlier, it allowed 100% FDI in the wholesale segment.
Uttar Pradesh chief minister Mayawati said on Sunday the step would make her state bankrupt. “As Congress supremo Sonia Gandhi is ill...the party has made an internal decision to make Rahul Gandhi the acting party chief and Prime Minister in the future. To please the yuvraj (crown prince), FDI in retail has been allowed to benefit his foreign friends," she was quoted as having said in a PTI report.
The Trinamool Congress, a constituent of the Congress-led United Progressive Alliance (UPA) administration that swept to power in May in West Bengal, has also publicly opposed the move.
The UPA is expected to face ire from the opposition in both houses of Parliament on Monday, indicating there could be sharp criticism in what could lead to uncertainty and keep foreign retailers at bay.
Analysts said this would hurt investment sentiment in the world’s second-largest emerging economy at the time when growth is slowing amid persistent high inflation.
“The political opposition will lead to uncertainty and keep companies like Walmart and Carrefour away," said Rakesh Arora, managing director and head of research, Macquarie Capital Securities India. “The policy might just remain on paper until the political opposition dies down."
Nitin Gadkari, president of the main opposition in Parliament, the Bharatiya Janata Party (BJP), said in a statement: “BJP-ruled states are not bound to follow the government’s new norms on allowing FDI in multi-brand retail trading and ease norms in single-brand retail."
Narendra Modi, BJP leader and chief minister of the investment-friendly state of Gujarat, has remained silent on the matter, indicating a guarded stance in a place where small businesses flourish.
Taking in account the publicly voiced opposition from various political parties, multi-brand retailers with overseas investment may face problems in opening stores in a number of cities with a population of over one million, the threshold set by the cabinet while expanding FDI in retail on 24 November.
These cities in 11 states ruled by political parties opposed to the decision include Bangalore, Kolkata, Chennai, Ahmedabad, Patna, Allahabad and Bhopal.
The government on its part launched a campaign to sell its latest reform measure. The commerce ministry published full-page newspaper advertisements seeking to clear “myths" about 51% FDI in multi-brand retail.
In the Rajya Sabha, where the ruling coalition does not have a majority, the opposition is planning to seek a debate with voting on the issue, according to a leader from a Left party, who declined to be named.
In the Lok Sabha, three parties—Communist Party of India, Communist Party of India-Marxist (CPM) and the Janata Dal-United—have decided to move an adjournment motion, indicating expanded FDI in multi-brand retail would consume much of the parliamentary debates in the next few days.
Pointing out that Congress leader and commerce minister Anand Sharma’s statement over the cabinet decision on FDI in retail could be discussed if the government suspends its decision and the spirit of the house is respected, CPM leader and Rajya Sabha member Sitaram Yechury said: “People are paying the price and the foreign and Indian capitals are reaping the profit. That is revolution the minister is talking about."
Even if the government fails to get a majority vote in Parliament in these discussions, it is technically not bound to withdraw the decision, but it will deal a political blow to the ruling alliance ahead of state elections next year in Uttar Pradesh, India’s most populous state.
To be sure, there is yet no visible change in overseas retailers’ plans for India on account of the political opposition to the reform. For instance, Scandinavian home products firm IKEA, which had stayed away from the Indian retail sector saying it will enter only on its own, said it is set to announce its plans for the market with the government allowing 100% FDI in single-brand retail, a PTI report said.
IKEA’s president and chief executive Mikael Ohlsson is visiting India this week to “announce strategic initiative for the Indian market", the PTI report quoted people familiar with the development as saying, who the news agency did not identify.
Investors would be disappointed if there is severe opposition to the reform, according to D.K. Joshi, chief economist of ratings agency Crisil.
“At this juncture, the Indian economy should benefit from a fresh doze of reforms that improve investment climate and lift sagging business confidence, and FDI in multi-brand retain would be one of these," Joshi said. “Such a reform move is critical at this juncture because the global economy is not in good shape, which is impacting India and this is one thing that is in our hand."
If opposing political voices get stronger, it could beat down shares of local retailers, Arora said.
“Companies such as Pantaloon, Phoenix Mills and Provogue could see some losses in their stock prices if the government finds it difficult to implement the new reform measure," Arora said. “More than foreign companies wanting to enter India, it is the Indian companies hopeful that some FDI is allowed to bring in the much-needed liquidity."
FDI in multi-brand retail was being sought to be allowed for its potential to create jobs even though it could threaten the existence of mom-and-pop stores that thrive in street corners.
Those in favour of this step also say it has the potential to check inflation, especially as retailers build efficient food chains which the government has failed to do.
“This is a positive step, not for the short term, but in the longer-term perspective, FDI in retail would have been a pretty helpful step for India," Arora said. “But now with the political parties opposing, it is a serious blow."