After a long and very hard fought intellectual, political and very personal battle, the Government of India has finally decided to permit international retailers to invest directly in the country. It has taken close on 10 years for this decision to come through, and sadly, despite this momentous event, it has still left the retail industry in utter confusion. I have always wondered why Retail in India had become the unfortunate victim of a completely unjustified political focus, for, what ought to have been a simple technical decision based on sound economics has unfortunately become an unexpected high decibel all-stakes-on-the-table battleground. The notifications over the past few months – Single Brand Retail earlier and the current one (please see link below) has laid out some very rudimentary guidelines permitting investments under two broad sub-divisions – Single Brand Retail and Multi Brand Retail, but the absence of clarity is quite disconcerting, due to which, no major retailer can be expected to be queuing up at the Ministry’s doors begging to be allowed in – not presently, anyway.
Single Brand Retailing is totally stuck due to a rule that mandates 30% local sourcing from launch of business, and even a cursory internet search on this subject throws up an equal number of stories that speculate that the rule will be diluted and an equal number that disdainfully insist that it will never happen. One is appalled that we as a nation have the gall to invite investment in this cloak and dagger manner and one is equally amazed that the world’s finest retailers are still taking us seriously! In my view, ‘Single Brand Retail’ is not even a genuine and cogent classification, and if it were to exist, this rule that defines the quantum of local sourcing must be introduced in a phased manner over a 5-year period in the least. While the silly season on this rule is not in a hurry to end anytime soon, some sense needs to prevail and the Government must not insist that the sourcing should be made only from SME’s, and should be extended to cover any Indian manufacturer. As the rule currently reads, an SME who is trained and developed to supply quality merchandise by a global retailer has to be dropped as soon as his turnover crosses USD 1.0 Million. The retailer, who spends a lot of time and effort in developing a reliable resource and enriched him in the bargain by sourcing from him, has to dump this supplier and search for a new one. So we are penalizing success now? Come On! Really?! What are we, some banana republic?
Multi Brand Retailing is in an even worse bind if that were possible. Apparently, this Government has been accused of policy paralysis for too long, and decided that it is best to promulgate a ‘paralyzed policy’ with a view to possibly taking some heat off its rear end! I am amazed as to how a national Government can make a rule that is not applicable by law all over the country automatically. This policy, which leaves the adoption of the rule or of dropping it to the States, is a very confusing and spineless one. Perhaps, a new retail entrant into the country will have a somewhat lesser cloud of confusion, as they can pick and choose to enter only those States that have adopted the new rules. While this is possible in theory, it is highly unlikely for a major retailer to invest in the country if he is not sure of how many states he can operate in and how many stores he can ultimately build. If one is not sure of one’s operational scale in the medium term, one is sure of nothing, and when one is unsure, how will the investment come in? On the other hand, for an international Multi Brand Retailer who is interested in buying into an existing Indian chain the situation is simply hilarious. For instance, Future Retail* will have to perhaps split into multiple business entities each registered in various State Capitals and the investor can own 51% of only those entities that are registered in States that have adopted the new rules. Even if this is done, what happens to the Brand name of the retail chains in question? You cannot have a 100% Future Group entity and a 49% Future Group entity both owning the same Brand Name, so something will have to give. Also, without the ownership of the Brand Name and the goodwill it carries, what would be the use of investing in that chain? This is an unmitigated disaster in the making, and the mess is largely due to unnecessary politics.
So, why has Indian Retail become so embroiled in politics? I really do not have the answer to that. It will take a more diligent student of Indian Politics and apparently even of Indian Retail than I to answer that one. I can say only this. Retail is a very ordinary, low-tech, basic but capital intensive (both fiscal and human) industry and it is only an implementation of globally tested best practices, intelligently adapted to the Indian market, together with the investment of virtually unlimited resources and promoters equity that will make retail work in India. Retail really is undeserving of the shrillness of the political debate it has attracted. The NDA Government, in 2004 had the opening up of this sector in their Manifesto, but chose to 'U turn' on it in 2009. The UPA Opposition in 2004, who was the shrillest opponent of FDI in Retail, is now the one who is saying it is the best panacea for the nation in 2012 and neither position is entirely true. Also now, the NDA opposition is willing to verily bring down the Government for this rule, despite it being promulgated at least 10 years too late, by their own reckoning. It is evident that both political alliances have been working only for their own short-term benefit than to formulate policy for the good of the industry for the long term. I think that Politicians are the Worlds’ small people with even smaller minds, but are those that possess the Worlds’ biggest egos. This has been proved true in the case of Retail in India. Will they ever change and see the big picture? Will the UPA Government ever have the sagacity to seek the NDA’s support for a slightly modified bill and pass it through Parliament and end this atrocious debate once and for all? Will the NDA show the required bipartisanship that would be required? Can they agree to share the credit (or the blame), as the case may be? My expectations from the current crop of political leadership are unfortunately abysmal.
Another aspect of the debate that has befuddled me no end is the seemingly senseless and unnatural segregation of Retail into ‘Single Brand’ and ‘Multi Brand Retail’. My reading is that this classification was conjured up by the UPA Government, to perhaps try and get some Retail investment into the country by the back door. Obviously, the ploy has not worked, and one has heard of only 3 so-called 'Single Brand Retailers' of repute having made a formal application at the time that this was written. Looking at the minefield that the rules of Multi Brand Retail will be, I do not expect any serious Retailer to put his money where his mouth is. Investment will come only when there is complete clarity. Even with a very restrictive 26% regime but a very clearly framed rule structure, investors would be tempted to go all the way, considering the innate attractiveness of the Indian market. With all the confusion hanging over our 51% and 100% regimes, I do not expect the investment flood gates to open anytime soon.
A more logical and sensible categorization of Retail would be one divided along the lines of ‘Food Retailing’ and ‘Non Food Retailing’ which would be more appropriate for the Indian scenario. State Governments must look at the Retail industry from this paradigm and formulate the rules as required of them by the Central Government. One can understand the political sensitivity of food retailing, but why are we having the Government clubbing all retail together? What are the risks in permitting retail of let us say, Books, Consumer Durables, Cosmetics, Jewelry and a host of other lifestyle goods and services by Multi-national Retailers? This artificial Clubbing together of all Retail is ham-handed and ill-conceived as it would surely be counterproductive - both to the politics of the issue and for the retail industry, and the nation as a whole. While one can understand the social context of Food Retail needing to be restricted to ensure that the political agenda is addressed, one firmly believes that Non-Food Retail should be simply removed from all unnecessary controls and allowed to propagate freely.
This kind of rational categorization will perhaps prevent State Governments from viewing retail with a jaundiced eye and ascribing the motives of the Devil himself to all the international Retailers. It is hilarious to hear some of the comments made on Walmart and Tesco during all the media sound-bites that our politicians love so much. Makes one believe that they are invading Huns or Vikings coming here to pillage and loot!
Perhaps when provided with this new perspective, even State Governments that are politically adversarial to the Central Government, but of otherwise progressive states like Karnataka and Tamil Nadu, where modern retail struck its first roots, will be more inclined to notify their own versions of the Retail rules and perhaps choose to restrict Food Retail while permitting Non Food Retail to proliferate as that has no political minefields to be negotiated. For most International Retailers, the markets of these two States and Andhra Pradesh are seen to be the most attractive as modern Retail has been in practice here since 1996, due to which the customers are quite sophisticated and pre-accustomed to the USP of Modern Retail. Also, as they are progressive States, their denizens have higher purchasing power, and also enjoy a relatively politically stable and generally peaceful business oriented atmosphere. I wouldn’t be very surprised if many International Brands choose to postpone their entry into India until these crucial States notify their version of the rules. This would be particularly true for Karnataka, and it needs to look at this very closely and very seriously as many international retailers would be keen to be headquartered in Bangalore, considering the fact that it is the most preferred city for expat managers. Thus, if Karnataka chooses political exigency over sound policy and economics, they will stand to lose a huge opportunity in the form of being the repository for all the investment and being the beneficiary of the tax revenues accruing out of such business entities.
Perhaps when provided with this new perspective, even State Governments that are politically adversarial to the Central Government, but of otherwise progressive states like Karnataka and Tamil Nadu, where modern retail struck its first roots, will be more inclined to notify their own versions of the Retail rules and perhaps choose to restrict Food Retail while permitting Non Food Retail to proliferate as that has no political minefields to be negotiated. For most International Retailers, the markets of these two States and Andhra Pradesh are seen to be the most attractive as modern Retail has been in practice here since 1996, due to which the customers are quite sophisticated and pre-accustomed to the USP of Modern Retail. Also, as they are progressive States, their denizens have higher purchasing power, and also enjoy a relatively politically stable and generally peaceful business oriented atmosphere. I wouldn’t be very surprised if many International Brands choose to postpone their entry into India until these crucial States notify their version of the rules. This would be particularly true for Karnataka, and it needs to look at this very closely and very seriously as many international retailers would be keen to be headquartered in Bangalore, considering the fact that it is the most preferred city for expat managers. Thus, if Karnataka chooses political exigency over sound policy and economics, they will stand to lose a huge opportunity in the form of being the repository for all the investment and being the beneficiary of the tax revenues accruing out of such business entities.
Note.
* The Retail Entity has been named only for illustration purposes and not with any other intent. The scenarios mentioned above would be true for all other Indian promoted retail chains too, many of which are on the edge of financial ruin and quite a few of them may be open to welcome an equity infusion at this point in time.
Additional reading.
http://sharmahemanth.blogspot.com/2012/02/grain-elevators-are-needed-in-india.html
http://sharmahemanth.blogspot.com/2012/02/grain-elevators-are-needed-in-india.html
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