Inside Story

Is India ready for global retailers?

We ask if letting megastores into the country’s marketplace will help balance economic reforms with poverty alleviation.

The Indian government has won a parliamentary vote on the contentious issue of foreign direct investment or FDI.

The move will allow some of the world’s biggest retailers such as Walmart, Tesco and Carrefour into the country’s highly-protected marketplace.

The issue, which caused an uproar across the Indian business sector, saw a heated debate in parliament on Wednesday before the government secured the vote.

About 97 per cent of the Indian retail sector is still driven by people and not by corporations … [and these people are] on their own labour with a small capital with low-entry barriers. Changing this overnight without sufficient regulations and safeguards could have disastrous impact on the livelihoods of the poorest of the poor.”

– Dharmendra Kumar, the director of India Foreign Direct Investment Watc

India’s economy is facing its worst year in a decade and Manmohan Singh, the country’s prime minister, is looking for ways to turn things around.

Letting in global megastores is part of his flagship reforms programme, arguing that it will cut waste and bring down costs.

Opponents say it will crush farmers and small shop owners.

India has the ninth largest economy in the world but it is suffering, with the manufacturing sector contracting, exports falling and growth slowing down.

It hit a nine-year low at 6.5 per cent in the year to March, when it was 8.5 per cent for the previous two years. Inflation eased to 7.45 per cent in October, after hitting a 10-month high of 7.81 per cent in September.

And, figures for October show the country recorded its worst ever trade deficit, soaring to almost $21bn.

Besides opening up the retail sector, the Indian PM wants to push through a raft of other reforms, trying to create opportunities that will make India more attractive to foreign investors. These include:

  • raising the cap on FDI in the insurance sector from 26 per cent to 49 per cent
  • allowing more overseas presence in pension funds
  • making land acquisition easier to allow overseas companies, for example, to buy farmland to build factories
  • granting licences to new, private banks

Why is FDI such a big issue in India?

The country has the world’s second-largest labour force with almost 500 million people, only China is ahead of it. More than half of them are in agriculture, followed by the retail sector which employs just over seven per cent of the total.

But poverty remains a concern – figures from 2010 showed 29 per cent of people in towns and cities lived on less than $1.25 a day. And in rural areas, it was 34 per cent. A World Bank report last year said attempts by the Indian government to combat poverty failed.

The focus of the discussion on this Inside Story is balancing India’s economic reforms.

Joining Kamahl Santamaria are guests: Dharmendra Kumar, the director of India Foreign Direct Investment Watch; Rajesh Menon, an advisory partner at KPMG Qatar; and Arvind Panagariya, a professor of Indian political economy at Columbia University.

 “Indian retail market is poised for big growth and it’s a great opportunity for the country to showcase to the world what it can offer .… [But it] is important that we make a separation between the two markets within the retail [sector] – the organised and the unorganised markets.”

Rajesh Menon, an advisory partner at KPMG Qatar