Red Tape hurdles investors

Fakir Balaji says regulatory hurdles keep away foreign retailers from India

Human Development BusinessRegulatory issues over the entry of foreign brands and luxury goods are keeping international retailers from investing in India in a big way, says a new study by the US-based global investment management firm Jones Lang LaSalle (JLL).

“Though international retailers have shown a keen interest to enter India, progress has been slow due to regulatory uncertainty on retailing by foreign businesses,” said the report, ‘A Magnet for Retail – Tracking the expansion of retailers across Asia Pacific’.

Union Commerce and Industry Minister Nirmala Sitharaman Wednesday told lawmakers in the Rajya Sabha in New Delhi that the NDA government would not “entertain” foreign direct investment (FDI) in multi-brand retail, as the ruling BJP was opposed to it.
The new government, however, has not initiated a move to scrap the policy on FDI in multi-brand retail introduced by the previous UPA government in December 2012.
In spite of entry hurdles, strong growth prospects have encouraged foreign retailers such as Swedish multinational H&M (Hennes & Mauritz AB) and British fresh handmade cosmetics firm Lush to enter the country’s expanding retail market.
“As a result of regulatory uncertainty, international brands have limited presence in cities across the country despite a high level of economic growth in the past decade and having large urban populations, the report observed.
Among the 30 major cities across Asia Pacific JLL surveyed for the report, Delhi ranked 24, followed by Mumbai at 25 and Bangalore 27 for the presence of international retailers in top luxury brands.
As consumer spending in Indian cities is still on the threshold of growth in the Asia Pacific context, the break-even period for retailers is discouragingly high, resulting in their low penetration.
“Though rents for baseline retail properties in India are generally affordable, prime retail assets command premium rentals across cities when compared to cities in the Asia Pacific (APAC) region,” JLL India research head Ashutosh Limaye said.
With the average vacancy rate in malls across the country being high at 19 percent, high-grade malls are in short supply.
Poor quality malls are reasons for higher vacancy though the vacancy level in superior malls is comparable to that of such malls in China.
“As international luxury and mid-tier segment retailers are focussed on this category of mall spaces, they face a challenge in entering or expanding business in India,” Limaye noted.
While a changing consumer profile and retail market dynamics ensured that demand for retail spaces in China met with the quality of supply, India has to move up the evolutionary ladder to become more attractive to international retailers.
As the country’s financial and commercial hub, Mumbai is also the nation’s fashion capital, where brand awareness among consumers is higher, encouraging more international retailers and luxury and fashion brands to tap into its retail market.
“Regulatory uncertainty on retailing for foreign firms has impacted entry of new brands. As mall shopping is still a popular concept, key shopping centres such as Palladium at High Street Phoenix, Atria, Inorbit and Oberoi Mall offer a refined mix of retail, dining and entertainment, the report said.
New retailers which opened shop in Mumbai include Forever 21 and Thomas Pink.
The report identifies major trends in key markets across the APEC in terms of retail sales, market size and rental rates.
“With strong growth prospects, we are seeing both mid-tier and luxury brands from the world over expanding to several locations in Asia Pacific,” Limaye added.
Asia Pacific continues to witness rapid economic growth, raising living standards of the region’s people and driving retail demand.
With persisting economic challenges in many developed markets, international retailers are looking to emerging markets such as Asia Pacific for growth.
Sheer market size, in terms of population and economic might, is one of the compelling drivers for international retailers’ expansion into the Asia Pacific region.
The region accounts for 54 percent of the world’s population and the number of its people is projected to rise to 4.1 billion by 2020. The region’s share of the world economy is set to touch 40 percent by 2020 from 36 percent in 2013.
With forecasts of strong economic growth, more countries in Asia Pacific will move up the rankings of the largest economies worldwide. In addition, more city dwellers with rising incomes will create huge potential consumer demand.
An additional 40 million people will live in cities across Asia Pacific by 2020, with China and India accounting for the vast majority of them shifting to cities.
The region also accounts for one-third of the world’s middle class, which is projected to increase to 46 percent by 2020.
“Rising income levels mean that many aspiring consumers can afford to purchase fashion or even luxury items for the first time, while large urban centres make for ideal entry points for retailers,” the report added.