Unpacking India

The consequences of liberalisation in India will include bafflement and sore thumbs

Business

Weekend mornings spent looking for the exit followed by afternoons trying to work out how part A is meant to fit into hole B—Indians have so much to look forward to in 2017. The country’s first IKEA store is under construction and will open its doors in the southern city of Hyderabad late in the year. A decade after the plans were first proposed, and then shelved because of laws restricting the opening of shops by foreign brands, the Swedish chain’s arrival marks a symbolic victory for the forces of liberalisation in India. Whether other international investors follow suit will be a gauge of how much India is really opening up under the administration of Narendra Modi.

IKEA was the first foreign retailer to get approval to open stores in India following a liberalising push in 2012. Navigating the thicket of India’s central and state bureaucracy has been no easy task, but IKEA clearly thinks it has cracked it: the firm now plans to open 25 stores by 2025, more than it now has in Britain or Sweden, its home market. That is a reflection of India’s status as a fast-growing economy, and one rapidly building a middle class with a presumed taste for Billy bookcases and bentwood loungers. Retail sales in India are expected to reach around $1.2 trillion by 2020, nearly doubling in five years, according to a study by the Confederation of Indian Industry and Boston Consulting Group.

The government is trumpeting its openness to foreign investment. But retail is one area where India’s protectionist instincts kick in. Foreign stores that sell more than one brand, such as supermarkets, are still in effect banned in order to protect the legions of small shopkeepers that would struggle to compete with them. Single-brand shops are easier to get approval for, but even then many big foreign firms prefer to set up joint ventures with local partners to get treated more like local shops. (Marks and Spencer, for example, has joined forces with Mukesh Ambani, India’s richest man.)

IKEA’s boss in India, Juvencio Maeztu, says officials have gone out of their way to attract his investment. He hopes a gradual move from a culture of inspection to one where businesses can “self-certify” compliance will make day-to-day running of the stores smoother. IKEA has at least one more hoop to jump through: within five years, 30% of all the stuff it sells must be sourced from India. That is fine for IKEA, which has long made things in India for its international stores anyway. But other firms are not so lucky or flexible.

Where IKEA has forged ahead, will others follow? Amazon is investing heavily in India, even though laws prevent it from shipping its own inventory (it acts mainly as a matchmaker between buyers and third-party sellers). Adidas plans to open stores in 2017—but won’t be allowed to sell its Reebok brand in them. Walmart is restricted to cash-and-carry outlets closed to the general public. Apple’s idea to open its own fancy stores has run into the sourcing hurdle: shifting even a small portion of its production to India looks like a deal-breaker for now

More broadly, a slew of reforms in the past two years has pushed global businesses at least to explore whether they should put money to work in the world’s second-most-populous country. Many sectors once earmarked for Indian firms have been opened to foreigners—that is, to those willing to abide by several tomes of small print. By April, a single “goods and services tax” will replace a jumble of state-by-state levies which currently make doing business between different bits of India a headache.

Foreign investment has soared as a result, though not in the job-heavy manufacturing sector which Mr Modi has worked hardest to promote. Many companies are waiting to see how the likes of IKEA get along before taking the plunge. If operating in India ends up being no trickier than putting up a flatpack wardrobe, expect even more firms to try to assemble a business there.

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