India Hard-Sells Retail FDI - Analyst Blog

As the resistance to foreign direct investment ( FDI ) in retail gathers storm, the Indian government has decided to take the opposition head on. The government was virtually forced to put the 'FDI in retail' policy on hold within days of its announcement.

The government has now decided to embark upon a campaign to convince all stakeholders, such as farmers, traders and shopkeepers about the benefits of the policy. This looks like a clever move to outsmart the continuing political opposition.

Ever since the financial crisis in Europe deepened, the Indian rupee has faced a rapid depreciation. The currency lost as much as 16% in the last four months and close to 7% vis-à-vis the dollar between October-end and November-end. Reserve Bank of India, the country's central bank, did not step in to stem the tide because it appears to be short on its ability to have an affect.

Although the Indian rupee is not pegged to any specific currency, over 80% of the country's external trade is denominated in US dollars. FDI will be a long-term fundamental solution and should shore up the weakening currency and help improve the balance of payments situation by building up foreign exchange reserves.

Although easing of late, India has also been seeing a trend of high food prices in the neighborhood of 9%, one of the highest among the G-20 nations despite large stocks of food grains.

Inflation has not necessarily been triggered by high commodity prices. Distribution and logistical inefficiencies that exist as the produce travels from the producer to the consumer have been responsible no less. Monetary measures, like raising interest rates have had little impact, but for making loans expensive and slowing down credit growth that tightened economic growth, lowered to 7.5% for 2011-12.

Foreign investment in Indian retail should help build the critical infrastructure, so very essential in a sector that is unorganized, lacks scale efficiencies and promotes disguised unemployment. Improved warehousing and better supply chain management across the country would fetch better prices, reduce wastage, work as a force multiplier and reinvigorate the other sectors.

Many large international retailers such as, Macy's Inc. ( M ), J.C. Penney Company Inc. ( JCP ) and Marks & Spencer source their merchandise requirements from India. The country needs investment dollars as much as retailers, like Wal-Mart Stores Inc. ( WMT ), Target Corporation ( TGT ) and J.C. Penney want to sell in this large market (estimated at $450 billion).

A large population of 1.2 billion (2011 census) notwithstanding, India has a burgeoning middle-class, which is growing prosperous. Besides, 'young India' (65% below the age of 35), which is becoming increasingly aspirational in their consumption preferences, is expanding too. India is much too large a market in terms of size and range to be ignored by the international retailers.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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