India to Push Reform with Retail FDI - Analyst Blog

India's Prime Minister Manmohan Singh has refused to relent on allowing foreign direct investment ( FDI ) in retail in an interview to Bloomberg. Although the political opposition to reforming the sector is fierce and refuses to die down, Singh's government will push its agenda ahead.

The retail sector in India is largely unorganized -- a predominant preserve of small shopkeepers and 'corner' shops. The sector suffers from dis-economies of scale and over-intermediation, operates on thin margins, masks seasonal unemployment and is plagued by distribution and logistical inefficiencies.

According to the industry body Associated Chambers of Commerce and Industry of India, organized retail accounts for only 5%-8% (approximately $28 billion) of the country's total retail market (estimated at $450 billion) despite the presence of several domestic supermarket chains.

The government will have to hard-sell its agenda for retail reform to all stakeholders, including farmers, traders, shopkeepers, organized retail and big businesses keen to enter the sector. They need to be convinced of the benefits of the reform to dilute the political resistance.

As the retail infrastructure, such as, warehousing and supply chain management improves; food inflation, which has been a bane for over a year, would subside. FDI will also help from a fiscal perspective and shore up the sagging rupee, which has depreciated by around 17% this year besides improving the balance of payments situation.

Large retailers such as Macy's Inc. ( M ), J. C. Penney Company Inc. ( JCP ), Carrefour S. A. headquartered in France and Tesco plc of the United Kingdom -- the third largest retailer in the world in terms of revenues after Wal-Mart Stores Inc. ( WMT ) and Carrefour -- already source merchandise from India.

The country needs investment dollars as much as retailers like Wal-Mart, Target Corporation ( TGT ) and J. C. Penney want to sell in this large market, which is defined by favorable demographics.

With growing affluence, India is going through strong socio-economic-cultural changes. Despite a large population of 1.2 billion (2011 census), India has a burgeoning middle-class, which is increasingly becoming prosperous. The growing youthful population (65% below the age of 35 years), is becoming increasingly aspirational in its tastes and consumption preferences.

The country is also witnessing strong urbanization trends. An Asia Development Bank study projects that the urban population in India would rise to 550 million by 2030 or 42.0% of the total population from 28% in 2000. The Indian market is possibly the last remaining frontier in terms of size and range that the international retailers are eying with eagerness.

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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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