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Franchising in India - is the Indian Tiger set to roar again?

06/06/2014

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United Kingdom

There is good news for foreign franchisors and brand owners with the newly elected Government of India's plans to open up e-commerce to foreign retailers.  It is expected that there will be safeguards for the protection of the small and medium sized industries in India, but the aim is to allow foreign retailers to market their products directly to customers, whereas the current law restricts foreign retailers to engaging only in business to business e-commerce. Once the policy comes into force international brands will be able to provide Indian customers with similar multi-channel experiences as in developed markets.  

But these are not the only reforms expected to reignite the interest of overseas brands and investors in the vast latent potential of the Indian economy.  The Government of India has commissioned studies from several major international consultancy firms such as Accenture, KPMG and Deloitte to undertake research and identify ways to overcome some of the major hurdles that affect businesses from functioning efficiently in India. Accenture's study entitled "Best Practices to Improve the Business Environment in India" examines which States have the most efficient policies and procedures in place in areas such as local taxes and incentives, labour laws, infrastructure and utilities related approvals, land and building approvals, environmental clearances and other business regulatory compliance, with a view to implementing those on a nationwide basis. When reforms are implemented it will benefit performance of retailers and franchisees of international brands in India in all sectors, especially franchisees trying to meet their development targets in opening retail and restaurant outlets and hotels. There is also an expectation that the archaic land acquisition laws will be changed, and a general Good and Services Tax will be introduced to replace with a unified tax system the current patchwork of different types of taxes in different States.  Of course these would be very major structural reforms, and actually achieving this in India will certainly not be without challenges!  But what is not in doubt is the clear popular thirst for a real wind of change. Perhaps the Indians, like much of the rest of the world, are also looking over their shoulders at China?

On 26th May 2014, Narendra Modi was inaugurated as Prime Minister in a spectacular ceremony along with 45 Cabinet Ministers after the Bharatiya Janata Party (BJP) won a clear majority in the elections securing 282 seats itself and controlling a total of 336 out of 543 seats in the Lok Sabha with its National Democratic Alliance (NDA). It will be a break from coalition politics and allow the BJP to take policy decisions on its own.

There is very high expectation among the Indian people that the new regime will bring in swift reforms to the ailing economy which was characterised by policy paralysis, excessive bureaucratic hurdles with major projects especially relating to infrastructure stalled awaiting Governmental approval; rampant corruption; scams; high inflation; unemployment and devaluation of the rupee. The foreign exchange reserves had also depleted, and the Reserve Bank of India in the last year reduced the amount of foreign exchange that resident individuals and companies could take out of India (i.e. US $75,000 a year per person instead of $200,000 and companies could only invest 100% of their net worth abroad instead of 400%).  The double digit economic growth in India pre 2008 had nearly halved. Many western brands had put their plans to expand into India on hold against the backdrop of these problems. 

There are clearly now great expectations that Indian businesses will rapidly regain confidence to renew investment both at home and abroad, and that foreign investors and brands owners who had postponed entry will look now again at the Indian market in earnest.

In relation to the retail sector specifically, single brand retail operations had already been opened for foreign direct investment (FDI) fully since 2012, and this will remain unaffected. There is still some ambiguity about the BJP's approach to the multi-brand retail sector (large supermarket chains for example), because when the party was in opposition it had vowed to prevent liberalisation in foreign investment in that sector in order to protect small Indian retailers, farmers and avoid mass unemployment. The new Minister of Commerce and Industry, Nirmala Sitaraman was quoted in the press recently reaffirming the BJP's stand that foreign players will not be allowed to open megastores in the country as it may affect small traders and farmers. Some large multi-brand retailers including Wal-Mart and Metro are involved in wholesale business to business trade, which is still open to foreign investors.

For Indian brands to expand overseas there must be changes in relation to foreign exchange restrictions, improvement in the exchange rate of the Indian rupee against major convertible currencies, and the removal of uncertainties about the tax position. However, with numbers of advisors to the Government both on the technical fronts and from major universities around the world, there is greater optimism than perhaps ever before that sensible, practical changes will at last be put in place sooner rather than later.

Time will tell what barriers will be thrown up to block the new Government's reforming zeal, but  overall this changing position will certainly encourage many foreign franchisors to revisit their plans to enter India at this time.  With this new found enthusiasm for practical steps to drive the economy forward it is likely to prove easier now to find Indian companies and high net worth individuals who are ready to invest in developing major brands, as well as consumers with more confidence to spend as the economy improves.