February 25, 2011 / 1:06 PM / in 8 years

Foreign ownership in India retail seen on gradual path

* Industry says announcement unlikely in 2011 federal budget

* Rising inflation may accelerate govt’s plan to open sector

* Lack of political consensus poses a challenge

* Decision seen likely in six months, some watchers say

By Neha Singh and Nandita Bose

MUMBAI, Feb 25 (Reuters) - India is increasingly expected to begin easing foreign investment in multi-brand retail as it battles high inflation, but opening is expected to be gradual and a change in policy is seen to be at least a few months away.

Monday’s federal budget is expected to include a mention, at most, that opening the sector to more overseas investment is a possibility. A Finance Ministry report on Friday said allowing more foreign investment in retail is worth considering, and would help farmers and consumers. [ID:nSGE71O029]

“I don’t expect any announcement in the budget but definitely some announcement in the next three to six months, maybe earlier rather than later,” said Thomas Varghese, chief executive of Aditya Birla Retail, part of the Aditya Birla Group, and chairman of the Confederation of Indian Industry’s committee on retail.

India’s $450 billion retail sector is among the fastest growing in the world, but it remains heavily regulated, with strict limits on foreign investment. Just 6 percent of retail trade is organised.

The world’s four largest retailers — Wal-Mart Stores (WMT.N), Carrefour (CARR.PA), Tesco (TSCO.L) and Metro AG MEOG.DE — are seeking to expand in India, where an economy growing at nearly 9 percent is increasing the spending power of a rapidly burgeoning middle class.

They face opposition from “kirana” stores — small mom-and-pop shops — which account for the majority of India’s retail market and are valuable vote banks for politicians.

Asia’s third-largest economy does not allow any foreign ownership in multi-brand retail, and foreign ownership of single-brand retail is capped at 50 percent. Overseas investment in multi-brand operations is confined to wholesale businesses.

The promise of opening multi-brand retail to foreign investors has seen many false dawns. While officials both on and off the record say a lot of progress has been made and are very upbeat about its prospects, they have never committed to a timeline given the political sensitivities of the move. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ^^ For a factbox on India’s retail sector click [ID:nSGE71O0 6Y] For more stories on India’s budget, click [ID:nSGE71M04L]

For Website coverage of the budget, click here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ^ India's Trade and Industry Minister said last week that talks to open up the country's multi-brand retail sector to foreign investors were at an advanced stage. [ID:nL3E7DI0FK]

“We do not want to second-guess the Indian Government’s policy changes. However, it is encouraging to note the recent statement of the Minister of Commerce and Industry,” a spokesperson for Bharti Wal-Mart said.

Wal-Mart, the world’s biggest retailer, has partnered with Bharti Enterprises to operate wholesale outlets in the country. Germany’s Metro also operates wholesale outlets in India.

EASING BOTTLENECKS, INFLATION

Foreign participation would enable increased investment in logistics such as cold storage, and unclog supply bottlenecks, which contribute to double-digit food inflation.

Roughly 30 percent of post-harvest produce goes to waste in a country where nearly half the people are malnourished.

“The industry wants foreign investment in multi-brand, as food retailing is the key thrust to easing inflation,” Arnab Mitra, analyst at brokerage India Infoline said.

Indian food inflation is among the highest in Asia despite good harvests, and food prices have been in double digits for much of the last year, sparking protests and keeping pressure on a government already under fire over corruption scandals.

Finance Minister Pranab Mukherjee is expected to include measures to boost farm productivity in the budget on Monday.

“There are more and more government officials who are convinced that it is a means to tackling high, rising food prices as it removes supply chain inefficiencies,” said Pinakiranjan Mishra, partner and national leader, consumer products and retail, at Ernst and Young.

Mishra believes a decision is still six months away.

Leftist parties and small traders oppose moves to open the sector, which they fear would drive small operators out of business, and imminent liberalisation is not assured.

“In my personal view it is another two years before anything materialises on the FDI issue. The opposition is not in favour of it and the government has to clear it through the parliament,” said Govind Shrikhande, managing director at Indian retailer Shoppers Stop (SHOP.BO).

Editing by Jui Chakravorty

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