India's top economic adviser called on Friday for the government to open up the nation's vast retail sector to foreign investors to cut supply bottlenecks and ease stubbornly high inflation. Large retailers such as US-based Wal-Mart and France's Carrefour have been lobbying India's government aggressively to open the consumer market to foreign chains as they seek to grow outside saturated Western markets.
"We recommend that foreign direct investment in multi-product retail should be allowed," the Indian government's chief economic adviser Kaushik Basu told reporters. "This can be an inflation-busting measure." Foreign groups such as Wal-Mart can only operate as wholesalers and must partner with domestic firms to sell in India, amid fears that big Western retail chains could swamp small family-run stores. However, Basu said opening up the sector posed no danger to small retailers.
"The (retail) cake is so big and it will continue to grow," Basu said. Basu was reporting recommendations of an inter-ministerial group set up in February to look at how to reduce inflation, now at close to nine percent, despite nine interest rate rises in 15 months. The issue of fully liberalising India's retail sector has been under debate for years but opinion in the left-leaning Congress government appears now to be coalescing in favour of taking such a step as early as next year.
India's tight foreign investment rules are aimed at protecting small "mom-and-pop" stores in the sector where less than 10 percent of consumers shop in big Western-style stores. Only single-brand foreign outlets such as Nokia or Reebok are allowed to operate freely in the country of 1.2 billion people. In a bid to get round India's investment rules - which critics say are protectionist - some companies like Wal-Mart have entered the back-end retail supply chain in an alliance with a local partner. Basu said the full-scale entry of international retail chains would modernise storage and transportation methods, reducing spoilage and creating greater competition at the supply level - all of which could help bring down inflation.
"This will bring more competition in the market and reduce the gap between prices at the farm and retail levels," Basu said. Inflation, especially high food prices, is one of the biggest problems for India's embattled Congress-led government, which is also reeling from a string of corruption scandals,
Foreign firms argue their entry into India's retail sector bringing modern merchandising methods could help transform its antiquated food supply chain in which up to 40 percent of fresh produce spoils before it hits the market. In China, chain store retailers hold 20 percent of the retail market "and the benefits have been palpable" in food supply whereas in India organised retail stands at just over four percent of the market, Basu said. At the same time, Basu asid the entry of foreign retailers would have to be tightly regulated "to guard against the risk of these new corporations becoming monopolistic and charging high prices."
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