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Last Updated: Wednesday, 8 February 2006, 00:25 GMT
Countdown to India's retail revolution
By Toby Poston
BBC News business reporter

The economy is growing by 8% a year, its stock market rose by nearly 40% in 2005 and foreign investors are flooding in.

A small local grocery store in India
There are about nine million small grocery shops in India

Whichever way you measure it, business in India is booming.

And as the economy grows, so does India's middle class.

It is estimated that 70 million Indians in a population of about 1 billion now earn a salary of $18,000 a year, a figure that is set to rise to 140 million by 2011.

Many of these people are looking for more choice in where to spend their new-found wealth.

Protectionist

The Indian retail sector is now worth about $250bn (140bn) a year, but it is heavily underdeveloped. Well over 95% of the market is made up of small, uncomputerised family-run stores.

Now there are finally signs that the Indian government is dropping its traditionally protectionist stance and opening up its retail market to greater overseas investment.

Last month it eased restrictions on foreign investment, allowing overseas retailers to own 51% of outlets as long as they sell only single-brand goods.

For the first time, chains like McDonalds, Marks & Spencer, Body Shop and Ikea can, if they want to, open and control their own operations in India.

Previously, many of them had gone down the path of working with franchise partners, a policy followed by M&S which supplies clothes to eight "Planet Sports" stores.

They look like M&S stores on the inside, but they are owned by local retailers, and the UK retailer has no plans for that to change.

"This is now our policy for overseas expansion," said a spokeswoman.

"We rely on franchisees who know their local market, it's working very well in India."

Stiff opposition

But allowing in the big multi-brand, international retail groups like Wal-Mart, Tesco and Carrefour was considered a step too far, says Kamal Nath, India's Minister of Commerce and Industry.

"We have announced a partial opening of our retail market, to single-brand retailers," Kamal Nath told BBC News.

"But beyond that, we need to find a model that doesn't displace our existing retailers."

The Indian government has been conducting an impact analysis of how the introduction of supermarket chains like Tesco and Carrefour would hit its retail sector.

Further retail reforms are likely to be opposed by the Communist Party, a key ally of the Congress Party-led government.

Indian Commerce Minister Kamal Nath
Kamal Nath is worried about Indian shopkeepers

Many politicians still feel they have a duty to protect the livelihoods of the small shopkeepers they represent.

But the government does realise that foreign investment is badly needed to provide the infrastructure - the warehousing, distribution and processing operations - that are needed to upgrade India's chaotic retail industry.

An estimated 50% of the country's fruit and vegetables rot by the roadside before they reach market.

New jobs

It's a challenge that some of India's own industrial conglomerates are taking up.

Last January, Reliance Industries said it was investing $5bn in creating a chain of hypermarkets and back-end retail services.

Its plans called for the creation of a whole new supply chain, with new stores, cold storage facilities, food processing units and contract farming.

It will initially launch pilot projects in three Indian states before potentially rolling the strategy out to 500 Indian towns and cities.

The investment could create up to 400,000 jobs, it believes.

Elsewhere, consumer goods group ITC has set up its "e-Choupal" scheme to try and improve the productivity of farmers that supply its food processing operations.

It has built internet kiosks in rural villages to help give farmers access to the latest information on things like the weather, current market prices and what foods are in demand.

A farmer tending a field of sunflowers in India
Foreign investment could help boost India's agricultural output

"India's greatest need is to take the benefit of retailing to the doorstep of the farmer," ITC chairman YC Deveshwar says.

"There is such potential if we can invest in greater food processing. India has the most irrigated farm land in the world."

Tentative steps

So while Indian businesses forge ahead with their own plans to take a big share of Indian consumers' spending, and the Indian government slowly refines its retail roadmap, where does that leave supermarket giants such as America's Wal-Mart, Germany's Metro and Britain's Tesco?

For years, their plans for domination of the Indian retail scene have been sitting gathering dust.

German store group Metro has made tentative steps, via its chain of wholesale cash & carry centres in cities like Bangalore.

About 90% of the goods it offers come from local producers and suppliers, which could give it a head-start if the rules on selling to individual shoppers are relaxed in the future.

Tesco and Wal-Mart also have a limited presence in India.

A Metro cash & carry store in India
German retailer Metro has opened cash & carry stores in India

But they are not selling anything to anyone: Wal-Mart's 80 staff in India are there to look after the retail behemoth's purchasing in the region.

Even so, it has been lobbying the Indian government to allow it to open an office in Bangalore where it could research the Indian retail market and the possibilities for developing its operations there in the future.

Bangalore is also home to Tesco's Indian outpost, an office which looks after some of its back-office finance operations.

It says it has no firm plans for the region - it will not open up a wholesale operation like Metro - but admits it is watching for any further relaxation of retail regulations.

Inevitable

Most Indian business experts think it will not have to wait long.

"The recent move was just the first step," says Dr Mohan Kaul, chairman of the Commonwealth Business Council.

"Maybe this time next year there will be a further announcement.

"It's inevitable, there is no way that an open market for retailing will be stopped."


SEE ALSO:
India to liberalise retail market
25 Jan 06 |  Business
Why India's stock markets are rising
20 Dec 05 |  South Asia
Why India puts its farmers first
13 Dec 05 |  Business
India set to lure more investors
27 Nov 05 |  Business
Tesco boss 'eyes Indian market'
15 Nov 05 |  Business
India's economy packs more punch
21 Sep 05 |  Business


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