India’s recent announcement that it would permit “single-brand” retailers like Starbucks (SBUX) to operate freely in its domestic market does little for “multi-brand” players like Wal-Mart (WMT), which remains on the outside looking in.
In late 2011 India’s government floated the idea of letting Wal-Mart control 51 percent of the ownership stake in the stores it might build in the future, but a massive political backlash from powerful interest groups abruptly stopped that plan. As of today, Wal-Mart’s future in India looks bleak. That could change, however, if India’s economic challenges (slowing GDP growth, high inflation, etc.) reach a tipping point and enable real reform to gain traction.
It has been two decades since India began to open its economy to global trade and the result has been remarkable. In recent years its GDP has been growing at about 7 percent annually—a rate only surpassed by China among major nations. Despite this success, India lags far behind in key sectors of its economy, particularly in the retail sector, which remains antiquated compared to that of the United States and Europe.
In November, 2011 India’s government announced a major reform plan to help fix that problem. It said a new law would allow major “multi-brand” retailers like Wal-Mart to enter the Indian market, though limit Wal-Mart to a 51 percent stake in each of the stores they opened.
Since that announcement, however, there has been a tremendous backlash from all the interest groups that would be hurt by Wal-Mart, notably the small retailers that now dominate India’s domestic economy, and the multiple layers of middlemen who operate throughout its byzantine retail supply chain, where corruption is rife and turf jealously guarded.
These powerful groups, along with members of the BJP (the major opposition party) and even factions within the ruling Congress Party, howled in outrage at the government’s policy shift in favor of Wal-Mart. Playing on popular fears and demagoging the issue, their tactics proved highly effective.
Frightened by the political costs of moving forward too quickly, Prime Minister Manmohan Singh backed down and suspended his reform plan indefinitely in December, only two short weeks after it was announced—a significant defeat for Singh, for his party, for progress toward modernization of India and, of course, for Wal-Mart, too.
Attempting to salvage something positive from this debacle, Singh’s government said on January 11 that it would permit “single-brand” retailers like Starbucks to enter the Indian domestic market with 100 percent ownership of their stores. This was a step in the right direction for all those who want to see India’s economic growth remain strong and Wal-Mart’s global presence expanded, but it leaves an unresolved question: When, if ever, will India’s retail sector be opened in earnest to foreign competitors?
The upward trend of India’s economic development over the last 20 years indicates that the time will probably come when Wal-Mart, Tesco and other foreign retailers will be allowed into its domestic market, but it remains uncertain when that will be.
Prime Minster Singh and other reform-minded leaders who see the benefits of integrating fully into the global economy understand that India needs retailers like Wal-Mart to help modernize a system that is inefficient, corrupt and inflationary.
For example, according to the best estimate 30-40 percent of India’s agricultural output is wasted because the distribution infrastructure is not in place to get it from the farm to the consumer. The situation is worsened because graft infests the current supply chain, adding a mountain of unnecessary costs and driving up the final price that consumers pay.
It is in India’s interest to replace this counter-productive retail system, especially if it wishes to keep up with its rival China, which in marked contrast has created a highly profitable partnership with Wal-Mart, manufacturing many of its products that are shipped back to the United States and in turn permitting it to open more than 350 stores that sell to Chinese consumers.
India should learn a lesson from this remarkable success story, which is a case study proving the efficacy of David Ricardo’s “comparative advantage” ideas first postulated at the beginning of the 19th century.
While it makes a lot of sense for India to let Wal-Mart into its market, powerful interest groups have thus far been able to prevent the ruling government from implementing its reform plan. The announcement that “single-brand” retailers like Starbucks will be allowed into its market is encouraging on the surface, but is also a negative indicator since it shows India has significant systemic and political obstacles still to overcome.
Singh’s government says that it will revisit the Wal-Mart issue once a political “consensus” is reached, but Wal-Mart stockholders should not hold their breath waiting since no one knows when that day will arrive. As Amulya Ganguli, an analyst who follows India told Bloomberg recently, “It will be an act of great courage for Manmohan Singh to push [reform of the retail sector] through. I don’t think [Singh’s Congress Party] has the guts to go through with it.”
If Singh’s government does not currently have the political clout to push through its economic agenda, there is a good reason for that. High inflation (currently around 10 percent), corruption scandals and slowing economic growth have weakened it considerably, as has the strength of the protest that erupted after the Wal-Mart announcement was made. Until these conditions change, expect more of the same.
The power of interest groups to block initiatives which will bring large economic benefits to a nation is nothing new as shown in the United States by the recent decision of the Obama administration to prevent the construction of the Keystone oil pipeline. In India, Prime Minister Singh has similarly caved to the political pressure brought to bear on his government after it decided to permit Wal-Mart to enter India’s domestic market.
In order for Wal-Mart to eventually gain entry into this market Singh’s government will either have to develop a backbone or see public opinion in India shift in its favor. The second development, of course, will help with the first, but neither is visible on the horizon. If inflation remains high, however, and India’s economic growth stalls (its GDP has already begun to slow), a change in the direction of the political winds is possible, but probably not until the end of this year at the earliest, by which time contentious regional elections will have been decided and the Wal-Mart issue will have become less radioactive.