India’s move to open its retail industry to the world’s biggest operators may take years to achieve the levels of investment that will reduce inflation, as infrastructure gaps restrain store expansions.
Prime Minister Manmohan Singh’s government last week won parliamentary endorsement for its September decision to allow foreign direct investment in supermarkets, a move it says can help lower food prices should retailers like Wal-Mart Stores Inc. (WMT:US) and Carrefour SA build warehouses and cold storage facilities to improve the supply chain.
Overseas retailers will still be beset by congested roads, erratic power supplies and an array of taxes that hamper the movement of goods between 28 states. The likelihood that benefits from the retail opening will be delayed reinforces the need for deeper policy changes to address transportation and energy bottlenecks that are handicapping growth.
“It will take time for all the feasibility studies to be done for investment to come in,” said Robert Prior-Wandesforde, an economist in Singapore at Credit Suisse Group AG who has covered the Indian economy for almost seven years. “One shouldn’t expect to see any effects for two years or so and even then it will be very gradual.”
The nation’s benchmark BSE India Sensitive Index (SENSEX) has risen 4.1 percent in the past month, holding near a 19-month high on speculation the government will take more steps to boost growth and investment.
Singh’s challenge is to push through the remaining measures of his economic agenda, such as the creation of a National Investment Board to speed up project approvals, in the months before national elections due in 2014.
“The reforms overhaul is part of the government’s effort to overturn the economic slowdown,” said N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi. “The pace is largely dictated with an eye on elections and also by the fact that the economy is in dire need of intervention.”
The rupee is among the worst performing Asian currencies this year as Singh’s push to lure more foreign investors has been hurt by the widest budget deficit in major emerging nations and months of policy gridlock earlier in the year. At the same time, inflation exceeding 7 percent limits room for interest- rate cuts by the central bank.
Asia’s third-largest economy expanded 5.3 percent in the three months ended Sept. 30 from a year earlier, slowing to match a three-year low as growth in domestic spending and exports moderated. The trade deficit held near the widest in more than 18 years in November as exports fell for a seventh month, according to figures released by the director general of foreign trade today.
“I don’t think FDI in retail will have an immediate impact on growth or inflation,” said Samiran Chakraborty, an economist at Standard Chartered Plc. in Mumbai. “FDI in retail will have to assume a substantial portion of the total retail market in India to meaningfully change the modes of back-end operation.”
Singh is trying to reinvigorate growth as the faltering global economy threatens the outlook for Asia-Pacific nations even with signs of recovery in China. Australian business confidence plunged last month to the lowest level since 2009, a private survey showed today, while the Philippines reported exports climbed for a second month in October.
Indonesia’s central bank kept its benchmark interest rate unchanged for a 10th month today. In Germany, the ZEW Center for European Economic Research may report its index of investor and analyst expectations was negative for a seventh month in December, a Bloomberg survey showed.
U.S. Federal Reserve policy makers begin a two-day meeting today that will be followed by updated projections on economic growth, unemployment, inflation and interest rates on Dec. 12. Officials are considering whether to supplement $40 billion a month of mortgage-bond buying with Treasury purchases when their Operation Twist program expires at the end of the month. Reports on the trade balance and small business optimism are due today.
The retail rule change, the key plank of India’s biggest embrace of foreign investment in a decade, has yet to lure formal applications by a major retailer to operate in India in the three months since it was announced. While Singh’s Sept. 14 decision to allow overseas multi-brand retailers to invest 51 percent in Indian ventures didn’t require parliamentary approval to become law, the government agreed to a vote to end protests that had stalled legislative business.
Both houses of the Indian parliament endorsed the decision last week, paving the way for companies such as Wal-Mart, Carrefour and Tesco Plc to step up their presence in the world’s second-most populous nation and tap a market that Technopak Advisors Pvt. estimates will expand to $725 billion by 2017.
Standing in the way is India’s struggle to upgrade its more than 4 million kilometers (2.5 million miles) of roads, close a 9 percent power deficit and ease congestion at ports. Restrictions on store locations and investment rules are another restraint.
Foreign companies will be required to invest a minimum of $100 million, with half being used to build facilities such as manufacturing, distribution and warehouses within the first three years of their foray, India’s Department of Industrial Policy & Promotion said in September. Stores will be permitted in states where the local government gives its consent and in cities with a population of more than 1 million people.
Still, the retail victory may strengthen Singh’s resolve to overcome opposition to his plans to allow foreign companies to hold bigger stakes in insurance firms and for the first time permit overseas investment in pension funds. These two decisions need parliamentary approval.
“The vote was more a barometer on the government’s resolve to push ahead more contentious reforms,” said Chakraborty at Standard Chartered. “In that sense, it is a step in the right direction.”
India will set up a panel led by Prime Minister Singh to speed up approval of road, rail and port projects, including as much as $18 billion of stalled investments, two officials with knowledge of the proposal said last month.
“All in all, this is a big positive for the economy and ultimately for the consumer,” said Leif Eskesen, Singapore- based chief India and Southeast Asia economist for HSBC Holdings Plc. who previously worked for the International Monetary Fund, referring to the retail law. “But you need FDIs first and that would require a couple of years.”
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