Pia Heikkila, The National
January 12, 2012
Indians could soon experience the unique frustration of assembling Scandinavian flat-pack furniture as stores such as Ikea are to be allowed to open in the country under new laws on foreign direct investment (FDI).
The government is allowing single-brand retailers such as Ikea, Nike, Starbucks and Marks & Spencer to operate in India without local partners.
Previously, to operate in the country, a foreign company was required to take a local partner and could hold no more than a 51 per cent share in the joint venture.
The likes of Ikea stand to benefit most from the decision, said Devangshu Dutta, the chief executive of Third Eyesight, a consultancy.
"It is an important step for those companies who want to control the Indian business directly and completely," he said. "Ikea is such an example. It has mentioned in the past that it finds limited value from having a partner in the business and that it would like to control the value chain from source to consumer."
The decision was the latest development in wrangling over the FDI rules. In November, the government announced it was planning to ease the strict rules preventing multi-brand retailers such as Carrefour and Tesco from operating in India, but the change was scrapped at the last minute amid a political backlash.
Why all the drama? Because there is big money at stake. The Associated Chambers of Commerce and Industry of India estimates that the country’s retail sector will be worth US$1.3 trillion (Dh4.77tn) annually by 2018.
India is ranked as one of the world’s most lucrative markets for retailers because of increasing consumption by its growing middle class.
Market watchers say the potential for FDI is huge.
"Retailers who are willing to source domestic manufacturing units to enter the emerging retail scene of India will surely come in," said Raghu B Viswanath, the managing director of Vertebrand Management Consulting. "Along with them, brands like Ikea and fashion brands who have been long awaited in India, bringing in investment along with them."
Many overseas brands will still find it useful to have partners that understand the complex Indian business environment and can also share in the financial risks.
"The move will not change the retail landscape dramatically," said Saloni Nangia, the president of Technopak retail consultancy. "There may well be few more brands entering the country, but many will still need partnership because local partners have a better understanding of the market."
Indian suppliers enjoy some protection, as the new policy mandates 30 per cent sourcing from local small and medium enterprises for any retailer looking at more than a 51 per cent stake in an Indian retail business.
"This could be a barrier for companies that are viewing India mainly as an export market, since they would need to invest additional time and management effort in developing local sourcing links," Mr Dutta of Third Eyesight said. "For retailers who already have sourcing links in India, this will not be a problem."
India is determined to become more open for businesses. The FDI move comes a week after the country unveiled a move to increase foreign-investor access to its stock market. The government is also considering raising the cap on FDI in the aviation sector.
(This article was published in The
National on January 12, 2012.)