Foreign Direct Investment in Retailing in India

Historically, the structure of retailing in India was very fragmented with a large number
of very small stores serving most of the market. Supply chains were also very poorly developed
and fragmented. As recently as 2010, larger format big box stores, chain stores, and
supermarkets only accounted for 4 percent of retail sales in the country (compared to 85 percent
in the United States). This might sound like an ideal opportunity for efficient foreign retailers
such as Walmart, IKEA, Tesco, and Carrefour. In theory, these multinational enterprises could
enter the market and transform India’s retail space, making it more efficient and bringing modern
retail formats, technology, and supply chains to the country. This would benefit consumers and
producers from farmers to manufacturers. For example, it has been estimated that up to 40
percent of the food produced by Indian farmers is currently wasted because chronically
underdeveloped supply chains mean that food rots before it reaches the market.

In practice, small store owners in India have a long history of using their political power
to lobby the government to impose restrictions on direct investment by foreigners in the retail
space. Like incumbents everywhere, their goal has been to limit competition and protect their
businesses and jobs. Until 2011, foreign multi-brand retailers such as Costco, Tesco, and
Walmart were forbidden from owning retail outlets in the country. Even single-brand retailers
such as IKEA and Nike had to partner with a local retailer, were limited to a 51 percent
ownership stake, and had to go through a lengthy bureaucratic approval process.

By 2011, the Indian federal government had come to the conclusion that foreign
investment in retailing was needed to improve India’s supply chain, increase consumer choice,
and help farmers bring their products to market. This view was supported by much of Indian
industry, which saw the modernization of the retailing sector as an important condition for
continued economic development. Clearly, the government believed that greater foreign capital
and technology would help India grow its economy.

In late 2011, the Indian government announced a plan to reform foreign direct investment
regulations. The plan was to allow foreign multi-brand retailers such as Walmart and Tesco to
open retail stores, although they would be limited to a 51 percent ownership stake. At the same
time, the government stated its intention to allow single-brand retailers to set up wholly owned
stores. These plans were greeted with strong opposition from small retailers and rival political
parties, and the government was forced to temporarily shelve them.

In early 2012, the Indian government managed to secure approval for plans to allow
foreign single-brand retailers to open wholly owned stores, but imposed the requirement that a
single-brand retailer had to source 30 percent of its inventory from India. One of the first
retailers to respond to these changes was IKEA, which announced that it would invest $1.9
billion and set up 25 stores in the country. More generally though, many analysts viewed the 30
percent sourcing requirement as a major impediment to entering India. Both Apple and Nike, for
example, would have to establish significant production facilities in the country in order to meet
that requirement and set up their own brand stores.

In early 2018, the government modified the 30 percent requirement, giving single-brand
retailers five years after their initial entry to reach the 30 percent figure. The government also
allowed single-brand retailers to establish wholly owned subsidiaries without having to go
through the cumbersome government approval process.

In late 2012, the federal Indian government allowed foreign investors to open multi-brand
retail stores in India, but limited ownership to 51 percent. Moreover, in a nod to the strength of
the political opposition, the federal government made this requirement subject to approval by
individual states within the country, allowing some to opt out. Several states have done so, which
reduces the attractiveness of India as a market for foreign retailers. At the same time, India has
allowed 100 percent ownership of online retail marketplaces in India. Amazon took advantage of
this to enter the country in 2014 and has committed to invest $5 billion in India. Unlike in the
United States, however, Amazon does not sell goods that it has taken ownership of because that
would classify the company as a multi-brand retailer, limit its ownership stake in Indian
operation to 51 percent, and require it to take an Indian partner. Instead, Amazon only sells
goods offered through its marketplace platform by third parties. However, Amazon is investing
heavily in fulfillment centers and logistics infrastructure to enable it to deliver goods efficiently
to Indian customers. Its investment may help to boost the efficiency of supply chains in the
country.

Charles W.L. Hill_ G. Tomas M. Hult - International Business_ Competing in the Global
Marketplace 12E-McGraw-Hill Education (2018), page 223
1. What explains the fragmented nature of India’s retail sector? What are the benefits of this
system? What are the costs?
2. What benefits FDI could bring to the retailing in India? Who are against the FDI?
3. What policies has Indian government used to stimulate FDI overtime?
4. What is still the existing barrier to discourage FDI?