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Retail Reform Policy Approved by Indian Parliament’s Lower House

By Daniel Fleishman

Dec. 7 – MPs in India’s Lok Sabha (lower house) on Wednesday voted to approve a government decision allowing foreign supermarkets to expand into India. Considered one of the most momentous reforms in the last 20 years, this decision opens the door for FDI of up to 51 percent in India’s multi-brand retail industry.

Despite the fact that the government does not legally require lawmaker approval to enact this policy, the legislative endorsement carries significant symbolic value as a seal of approval for the continuation of the pro-business economic policy championed by Prime Minister Manmohan Singh.

Enacted with the aim of supporting continued economic growth, the decision will bring in a massive inflow of investment, which Singh’s Indian National Congress (INC) party claims will benefit both consumers and local producers. Consumers would be given a broader choice of products at lower prices while farmers would see a rise in demand for produce, meaning that less of their crops would rot in storage facilities. Small businesses, meanwhile, would be forced to become more competitive, efficient, and quality-oriented.

However, this measure passed with relative difficulty, meeting stiff resistance from opposition parties who claim that small businesses would not be able to compete with retailing giants such as Wal-Mart.

“Foreign companies are keen to expand their businesses in India as they see this as a big market. But our small businesses and traders will be wiped out,” said Sushma Swaraj, of the Bharatiya Janata Party, the largest opposition party. “Big retailers are not in the charity business. They will squeeze our farmers and small producers.”

Whether beneficial or detrimental in the end, the move is expected by most authorities to produce strong economic growth.

The Indian Council for Research on International Economic Relations claims the entry of foreign retail chains will result in 13 percent economic growth in the sector until 2011-12, with organized retail growing at 45 percent to 50 percent and unorganized retail at 10 percent.

However, whether the law will stay or go is yet to be seen. Even though the measure passed in the lower house by a sizeable margin (253 in support and 218 against), the Samajwadi Party and the Bahujan Samaj Party, who hold 43 seats in Parliament, decided not to vote. These two center-to-far-left parties have openly condemned the government policy, but have, through their abstinence, indirectly handed the INC-led United Progressive Alliance (UPA) a victory.

Given the volatile nature of this decision, the government will have an even more difficult time finding approval in the Rajya Sabha, Parliament’s upper house, in which the UPA holds an even weaker position than in the lower house.

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Dezan Shira & Associates provide a range of services for companies looking to undertake foreign direct investment into Asia, These include corporate establishment, accounting, tax, payroll, audit and due diligence. To learn more about the firm, please contact one of our specialists at china@dezshira.com, download our corporate brochure or visit at us www.dezshira.com


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