India's Tiger Economy and Foreign Investment
After a decade of high economic growth, India has been affected by continuous high inflation and chronically inadequate infrastructure. As a response to these issues, Prime Minister Manmohan Singh has revised the foreign investment rules to allow foreign retailers and supermarkets to enter India.
This initiative is particularly relevant to revitalise the economy in sectors prone to build competition and hinder inflation pressures in the long term, reported Stephen Koukoulas
in an article published in the Business Spectator. In the near future, Wal-Mart, Tesco and Carrefour will probably establish retailing operations throughout India as a result of the rules revision.
Allowing foreign direct investment in retailing would seem a tiny reform for many in the industrialised world. In contrast, for India, there are many shades to the approach, such as having firms with huge economies of scale operating to supply food and other household goods more cheaply than at present. “This will be critical in capping the prices for retail goods compared with the current structure of retailing which is characterised by many small, localised and inevitably inefficient operators. The retail reform, like most significant structural changes, is expected to take many years to bring to fruition”.
Also, another reason for the delay in the implementation of these modifications and something that is a great constraint on the ability for the mega-retailers to set up and operate is India's inadequate infrastructure. The big retailers' business model depends on the efficient and speedy transportation of goods from producers and importers to their shops, warehousing is critical and an unbroken supply of electricity is central for the storage of perishables. Unfortunately, India is inefficiently serviced on transport and electricity generation, which will make the retailing reforms slower to implement.
Mr Singh is aware of these infrastructure inefficiencies and has committed his government to build adequate infrastructure, but the time hold-up can be long for such projects.
The initiative to allow foreign retailers into India has also created controversy in the country. Populist politicians in the conservative Bharatiya Janata Party
are the ones who have shown most resistance to the plan while aiming at protecting the existing local retail outlets who are unlikely to survive when the foreign retailers establish their operations. There is also the nationalist notion that these foreign firms will by-pass local expertise and also direct profits out of India, the usual hallmarks from protectionists around the world.
“Thankfully common sense is prevailing and India is set for a massive boost of foreign direct investment that will increase productivity and efficiency”, Koukoulas stated. “The more that India embraces pro-market policies and structural reforms that boost productivity and economic growth with low inflation, the more sustainable the long-run expansion will be”, he concluded.