51% FDI allowed in multi-brand retail in India What to expect in reality?

I originally started writing this in November 2011 when the Indian government first announced its decision on FDI (Foreign Direct Investment) in the retail sector but abandoned it as the proposal was put on hold. However, this time the government announced its decision to allow FDI upto 51% for multibrand. There are definitely reasons to cheer for both the domestic players such as Future Group, Reliance retail and the multinationals - early entrants such as Walmart, Tesco and Metro - as they are salivating on the future potential of a USD 400-450 billion retail market where the share of organized retail is only around 5 - 6%. While the burgeoning middle class of over 300 million people with growing incomes and changing food consumption habits are what the retail sector is enthusiastic about, it doesnt come without challenges and roadblocks that are unique to India. As Thomas Reardon of Michigan State University and Bart Minten of IFPRI described, the Indian retail industry has shown unique characteristics in all its three phases of growth from the initial Government owned retail stores to the entry of several domestic companies and of late of several foreign players. All along its course, the industry successfully negotiated the challenges to reach its present level today. Though the industry and the stock markets in general are euphoric over the decision, I express cautious optimism regarding what the 51% of FDI allowed currently in multi-brand retail can do to the industry, the agriculture sector and the ailing economy as the sector accounts for 14-15 of the nations GDP. Majority of the industry experts and economists feel that foreign players will not make a beeline to invest in India based only on the announcement. Given the caveat that the States can decide on the matter on their own, ground-level implementation and the impacts of the policy remain to be seen. All states except those that either support or those that are in alliance with the ruling UPA II government at the center oppose the decision. So there is going to be many ifs and buts regarding the implementation of the policy in each state. Ultimately, the companies that are presently operating and those who are waiting to enter will have to make certain adjustments to optimize their overall cost of doing business. As one of the experts opined, the companies need to split their operations based on their number of stores in states that support and oppose FDI. For e.g. Big Bazaar (part of Future group) has almost half of its 161 stores in states that oppose FDI while this is the case for companies such as Reliance Retail and Aditya Birla groups More. Though its a lengthy process and can take anywhere between 6 months to a year, the companies look keen in pursuing the challenge. Additionally, strong lobbying by the federations of local shop-keepers in the states that oppose FDI would be an important issue and one should not be surprised to see mass protests, demonstrations and sometimes undesirable events as well. In the past, there were few instances where retail stores of a well known company were vandalized in some states. These are new set of challenges that the industry is likely to face due specifically to the FDI policy announcement in addition to other well known challenges such as archaic marketing rules, land acquisition acts, differences in taxation, restrictions in interstate commodity movements etc. However, the industry seems to shrug these issues off and proceed confidently after the policy is announced. Some of the top industry leaders expressed high level of confidence that those states that oppose FDI currently, will fall in line after witnessing the potential positive contribution to the states economies, job growth and incomes. Given the complexities in the actual implementation of the policy, one has no doubt that the industry is set for interesting times ahead. Raghavan Sampathkumar Agribusiness Consultant Chennai, India vnsraghavan@gmail.com