India’s Retail Plan Kills Its Credibility

The cabinet in India has set new rules that would allow large outside retailers like Walmart (NYSE: WMT) to own 51% of local multiproduct retail establishments. But it appears that parliament will turn down this plan. So, India is about to prove that its government cannot be trusted to keep its word.

The cabinet’s announcement was cheered by large international retail firms that have wanted access to the second largest market in the world by population. Companies in India that make consumer products viewed the decision as a way to increase distribution networks. However, small Indian retail stores have objected to the entry of companies such as Walmart into their markets.

Walmart has faced the same problem in the U.S. Local government and retail establishments have locked the world’s largest retailer out of their cities or counties. Those lockouts have been effective. But, because there are no national laws that prevent Walmart from expansion, the company can rely on its own ability to lobby locals to build a presence. Walmart had success recently with such lobbying in Chicago. It traded jobs for stores, which is not a bad exchange for Chicago while there is a recession.

The India matter is quite different from that in the U.S. for Walmart and its rivals, which have pressed to get into the market for years. Walmart has invested ten of millions of dollars in the infrastructure necessary to distribute goods to stores. Those investments may turn out to be futile.

India has a problem, but one that is not restricted to it. Emerging markets sometimes block outside businesses to help local companies. Those blocks may allow in-country operations to work with protection. It is not clear whether consumers in these nations are helped, because a closed market often means higher prices.

China is the one large emerging market that has allowed outside multinationals to operate within its borders. It has not done much to restrict these firms once they have established their presence. China knows what India does not. Foreigners may hurt local entities, but they create healthy competition, drive out the weakest companies and offer consumers something a market without competition cannot — low prices.

India is likely to pay the price  for its intransigence. Companies like Walmart will walk away, taking with them the benefit of open markets.

Douglas A. McIntyre