NEW DELHI— In India, two newly elected state governments have rolled back decisions to allow the entry of foreign supermarkets. This is yet another blow to the country’s hopes of winning foreign investment in the retail sector, and could further shake global investor confidence in India.
The decision by the northern Rajasthan state earlier this month to bar foreign direct investment by overseas retail chains such as Walmart followed a similar move by Delhi.
New local governments took charge in both states in December -- led by the Bharatiya Janata Party in Rajasthan and the Aam Aadmi Party in Delhi. Both parties oppose foreign supermarkets, fearing they could take away local jobs.
The federal government allowed global retailers to enter India more than a year ago in the face of stiff political opposition, but it left it to individual state governments to make the final call. So far, fewer than half the country’s 28 states have given a go-ahead to foreign retail chains.
Arpita Mukherjee at the Indian Council of International Economic Relations in New Delhi said the decision by the Delhi and Rajasthan governments will further dampen the enthusiasm of foreign retailers, who are already disheartened by tough regulations on their entry into a market that she called “very difficult to operate."
“This is the first time that we have a rollback of the policy, and that gives very, very wrong signals to investors. India is a large market, but it is a highly fragmented market and our growth rate has slowed down. India is not an easy market to set up your supply chain,” said Mukherjee.
So far, Britain-based Tesco is the only global chain to propose an investment in India. It announced in December that it will invest $110 million and partner with a local company to set up three to five local stores every year.
That is some positive news for India, which had hoped to attract billions of dollars in a retail market estimated to be worth $500 billion.
However, industry analysts think most retail chains are waiting to see who takes charge of India’s next government after elections, to be held by May. The ruling Congress Party, which allowed the entry of supermarkets, is expected to lose power. The BJP, which is tipped to win, is broadly considered more business-friendly. However, the party opposes foreign supermarkets on the grounds that they could impact the livelihood of small shopkeepers - a core support base.
Devangshu Datta, heads of Third Eyesight consultancy, which focuses on the retail sector, stressed the importance4 of predictability for foreign investors.
“If there is one thing that any investor looks at, it is predictability in any form. From that perspective, any reversal, and especially quick reversals, are negative, and that makes any investor who is already cautious even more cautious. Unfortunately that is the environment we are operating in at the moment,” said Datta.
What happens in the retail sector could be key as India seeks to restore international investor confidence and give fresh momentum to its flagging economy.