* Fewer than half of Indian states have adopted multi-brand
* Rajasthan is second state since December to bar foreign
* BJP party, which opposes supermarket FDI, ahead in
* Tesco only global player to invest under India's FDI rules
By Tony Munroe
MUMBAI, Feb 2 The Indian state of Rajasthan has
barred foreign direct investment in supermarkets, an ominous
sign for global retailers who covet India's vast but fragmented
retail sector if the country's main opposition Bharatiya Janata
Party (BJP) comes to power nationally in upcoming elections.
The BJP is considered to be more investor-friendly than
India's ruling Congress party but opposes foreign direct
investment in supermarkets because of its impact on small
shopkeepers. It unseated Congress in Rajasthan's state elections
The Associated Chambers of Commerce and Industry of India
criticised Rajasthan's policy reversal, made on Friday, saying
it would "dent and shake" global investor confidence.
"If one party reverses the decision of its rival
dispensation upon change of guards, the policy and political
risks for global investors would definitely increase in India,
scaring them away," D. S. Rawat, secretary general of ASSOCHAM,
said in a statement.
In late 2012, the government of Prime Minister Manmohan
Singh opened India's $500 billion retail industry to foreign
operators, allowing companies such as Wal-Mart Stores Inc
and Tesco Plc to own majority stakes in Indian
chains for the first time.
However, India left it up to individual states to decide
whether or not to allow foreign retailers.
So far, fewer than half of India's 28 states have adopted
the policy, making it harder for retailers to exploit economies
of scale by setting up sourcing and cold storage networks that
could serve stores in contiguous states.
Stringent local sourcing rules and worries that the policy
might be overturned have also kept most global supermarket
chains on the sidelines.
Polls show the BJP is on track to win the most seats
nationally in elections due by May. However, no party is
expected to win the 272 seats needed for an outright majority,
meaning the biggest party will seek to form a coalition with
"This is all political posturing ahead of the national
elections. No government can come in and ignore foreign
investors," said Harminder Sahani, managing director at Wazir
Advisors, a retail consultancy.
"The most likely outcome is the BJP will scrap the existing
policy and come up with a new one with additional conditions but
they will come up with something," Sahani said.
TESCO IS LONE INVESTOR
Tesco, the world's third-largest retailer, in December
unveiled a relatively modest plan to invest $110 million in Tata
Group's Trent Hypermarket Ltd to open stores in the
states of Maharashtra and Karnataka.
Maharashtra is home to the Indian financial capital, Mumbai,
and is led by a Congress party alliance. Neighbouring Karnataka,
where the technology hub of Bangalore is located, is run by a
"We have noted the decision of the state government and will
bear it in mind as we consider our future plans," a Tesco
spokesperson told Reuters.
In October, Wal-Mart, the world's biggest retailer, walked
away from its partnership with India's Bharti Enterprises to set
up retail stores, citing unfriendly regulations. Wal-Mart still
runs wholesale outlets in India.
Last month, the newly-elected Aam Aadmi (Common Man) Party
government in New Delhi barred foreign supermarkets in the
The Indian economy grew 4.5 percent in the last fiscal year,
or less than half its rate in the years before the global
financial crisis, and sluggish investment due in part to
inconsistent policies has contributed to the slowdown.
"From any investor's perspective - foreign or domestic - he
is looking at how predictable the environment is in the future,"
said Devangshu Dutta, chief executive officer of Third Eyesight,
a retail consultancy.
"The policy framework and the overall environment are not
encouraging the foreign investor to take that call," he said.