India’s government has allowed foreign brands such as Adidas and home furnishings giant Ikea to open 100 percent owned shops, but will continue to block the entry of supermarkets.
The retail reform allowing wholly foreign-owned “single-brand stores” into the country was announced late on Tuesday by the government, which had initially announced sweeping plans to throw open the sector.
Last month, it said it planned to allow in foreign supermarket chains such as Walmart, but it backtracked two weeks later amid parliamentary opposition and protests from small shopkeepers.
Major Western brands such as Adidas already own shops in the booming retail centers and shopping malls of major cities, but they are currently obliged to operate with a local partner.
“Foreign direct investment [FDI] up to 100 percent, under the government approval route, would be permitted in single brand product retail trading,” the Department of Industrial Policy and Promotion said.
The condition is that the foreign companies owning more than 51 percent of their shops in India source a minimum of 30 percent of their products from small-scale local “cottage industry” suppliers.
“The move will not only mean more FDI, but lead to employment and also lead to more choices for consumers,” Rajiv Kumar, secretary-general of business lobby group FICCI, said in a statement.
“The sourcing clause will lead to a direct benefit for the SME [small and medium-sized enterprises] sector,” he said.
However, Arvind Singhal, chairman of Gurgaon-based retail consultancy Technopak, said he was skeptical that foreign companies would be rushing to open 100 percent owned stores because of the local supplier condition.
“This is an unfeasible demand. If a foreign brand like Ikea comes to India they want their own suppliers, who are very efficient,” he said.
The insistence that the suppliers be small in scale also limits the options of large companies such as Ikea.
“If they come here and do find good local suppliers, what happens when those suppliers soon become too big to be included? This means that the reform will not mean very much,” he said.
The change to the foreign direct investment rule does not require parliamentary approval. The government U-turn on allowing in supermarkets was forced after an ally in the ruling coalition threatened to quit over the move.
“I wonder about the government’s real intention to reform the retail sector,” Singhal said. “On this thinking, multi-brand supermarkets will never be allowed here.”
Other analysts said brands like Adidas, Louis Vuitton or Gucci, which are already in India, might look to expand their presence, while others would be unlikely to jump in with a 100 percent owned store.
“Action may not come from new players. Only those who understand the Indian markets and its challenges and policies will be interested,” said Anil Talreja, a partner with consultancy Deloitte India.