VZCZCXRO3827
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHPW
DE RUEHNE #4801/01 3040841
ZNR UUUUU ZZH
R 310841Z OCT 07
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 9052
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEHCG/AMCONSUL CHENNAI 1795
RUEHKP/AMCONSUL KARACHI 8238
RUEHCI/AMCONSUL KOLKATA 1116
RUEHLH/AMCONSUL LAHORE 4185
RUEHBI/AMCONSUL MUMBAI 0881
RUEHPW/AMCONSUL PESHAWAR 4679

UNCLAS SECTION 01 OF 03 NEW DELHI 004801 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO USTR 
USDA PASS FAS/OCRA/HIGGISTON 
 
E.O. 12958: N/A 
TAGS: BTIO EAGR ECON EINV ETRD IN
SUBJECT: OUTLOOK POSITIVE FOR ORGANIZED RETAIL IN INDIA 
 
NEW DELHI 00004801  001.2 OF 003 
 
 
¶1. (SBU) Summary:  Despite a series of protests and a lack of 
political support for corporate retailers in a number of states, the 
corporations themselves, as well as industry groups, analysts, and 
government officials, remain optimistic that organized retail will 
grow and thrive in India.  Spencer's and Pantaloon Retail indicated 
that recent turmoil has not caused them to abandon their ambitious 
plans, but they and others are revising their strategies to ensure 
that small retailers and middlemen have a stake in the growth of 
organized retail.  The degree of policy tumult occasioned by the new 
Mayawati government in Uttar Pradesh, India's most populous state 
and an object of desire for every major retail player, has surprised 
many in the sector.  However, most believe the state will eventually 
accept organized retail.  All of Econoff's contacts felt FDI in 
multi-brand retail would come within a few years, and several 
mentioned that foreign companies should expect to meet resistance 
when they enter the Indian market.  Post recommends for U.S. 
companies an entry strategy that focuses on inclusive growth, as 
well as a capacity to tolerate the inevitable protests.  End 
summary. 
 
A WIN-WIN-WIN SITUATION 
--- 
 
¶2. (SBU) In Econoff's discussions with corporations, industry 
groups, and government agencies, and a clear consensus emerged that 
there are simply too many positives to organized retail for 
political opposition to impede its growth for very long.  Besides 
the corporate retailers, three key stakeholders--consumers, farmers, 
and governments--are likely to reap tremendous rewards from 
organized retail.  The consumer will get better prices, more 
variety, and a more comfortable shopping environment.  Most sources 
agreed that India's millions of farmers will get a better return on 
their crops when organized retailers purchase directly and develop a 
modern supply chain, increasing their share of the final 'retail 
rupee' from the current 35 or 40 percent claimed in a recent report 
by policy-advisory company CRISIL closer to the 65 percent farmers 
get in countries with higher penetration of organized retail. 
Ministry of Agriculture Joint Secretary for Marketing U. K. S. 
Chauhan finds a confluence of corporate and GOI goals here, as the 
GOI is exploring ways to improve farmers' incomes and reduce food 
costs for consumers.  Further, as Spencer's Zonal Merchandizing Head 
Pramod Kumar explained, governments gain from organized retail 
because corporations pay their taxes, whereas many small retailers 
do not claim their true incomes and thus produce less tax revenue. 
 
¶3. (SBU) Despite this, organized retailers have garnered little 
support from the central government and the governments of Uttar 
Pradesh (UP), West Bengal, Madhya Pradesh, and other states. 
Chauhan said plainly that the Agriculture Ministry is "keen on 
organized retail," and Anindya Acharya, Deputy Director of the 
Confederation of Indian Industry (CII), said that Commerce Minister 
Kamal Nath is equally supportive.  With the specter of mid-term 
elections on the horizon, though, political parties are risk-averse. 
 Politicians are more concerned with the votes they can get from the 
unorganized sector than with sound economic planning.  Prudent 
decisions on sensitive policy issues, all sources agreed, will have 
to wait for more stable times. 
 
¶4. (SBU) What makes organized retail such a sensitive issue is the 
political influence of the middlemen in the traditional agri-retail 
supply chain, said Chauhan, admitting that middlemen have valid 
concerns.  As for small retailers, early findings from a report by 
the Indian Council on Research for International Economic Relations 
show that organized retail is unlikely to negatively affect them. 
Said Mayur Toshniwal, Vice President for North India of Pantaloon 
Retail, "We can't compete with local vendors," because the nation's 
12 million mom-and-pop shops offer convenient locations, delivery 
options, a level of personal interaction, and occasional credit that 
organized retailers cannot match.  Chavi Hemanth, Senior Assistant 
Director of the Federation of Indian Chambers of Commerce and 
Industry (FICCI), added that many Indians enjoy the traditional 
shopping experience and guessed that at most, only one in 20 small 
retailers would go out of business because of competition with 
corporate players. 
 
THE WORST HAS PASSED 
--- 
 
¶5. (SBU) Both Pantaloon and Spencer's conveyed the sense that they 
had weathered the storm, after numerous protests against organized 
 
NEW DELHI 00004801  002.2 OF 003 
 
 
retail in the past few months.  FICCI's Hemanth said the protests 
had already reached their peak, and Spencer's General Manager of 
Operations Tarun Arora mentioned that an October 10 demonstration in 
Mumbai won only a fraction of the 50,000 to 100,000 participants 
that organizers had projected, with farmers and small retailers 
staying away. 
 
¶6. (SBU) Almost everyone with whom Econoff spoke also remarked on 
the similarity between the recent protests against organized retail 
and past unrest when the GOI liberalized the insurance, print-media, 
and other sectors.  Toshniwal called such protests "a generic 
problem of democracy," commenting that they are part and parcel of 
doing business in India and that they rarely have a lasting effect. 
 
FOCUS ON INCLUSIVE GROWTH 
--- 
 
¶7. (SBU) Still, Purnendu Kumar, Associate Director of Technopak 
Advisors--a consultancy firm working with Wal-Mart, Reliance, the 
Aditya Birla Group, Shopper's Stop, Mahindra Retail, and 
others--acknowledged that there is enough opposition to organized 
retail to persuade companies to adjust their strategies.  Technopak 
is advising clients to consider how they can involve supply-chain 
middlemen and small retailers in their growth.  Kumar suggested 
employing traders as advisors to help with supply consolidation, 
something Spencer's two representatives said they have already 
begun. 
 
¶8. (SBU) Chauhan, on the other hand, said, "I don't think we should 
bother much" about the middlemen.  He argued that they will be 
forced to pursue alternative employment anyway as the agri-retail 
supply chain improves over time and that companies should focus on 
mitigating the impact of organized retail on mom-and-pop stores by 
allowing them to operate as franchises or at least purchase from the 
big companies' distribution centers.  He also recommended that 
companies invest in training farmers in modern farming techniques as 
well. 
 
THE SPECIAL CASE OF UTTAR PRADESH 
--- 
 
¶9. (SBU) The mention of UP evoked laughter and head-shaking from 
more than one source and anguish from others.  Pantaloon's Toshniwal 
said that he expected problems in Kerala and to some extent in West 
Bengal, where Left governments are in power, but the political 
upheaval in UP came as a surprise.  He referred to August 23, the 
day UP Chief Minister Mayawati ordered all stand-alone retail 
outlets in the state to close their doors, as "a black day for the 
industry." 
 
¶10. (SBU) When Mayawati issued her closure order, she also convened 
a committee to analyze the potential impact of organized retail in 
the state and gave a one-month deadline for the committee's report. 
Technopak's Kumar believes that the report will never come, that 
Mayawati was never committed to a sincere analysis.  The press has, 
by and large, ignored the issue of the overdue report, but business 
daily The Mint indicated on October 22 that the committee had met 
just once since August 23, had not scheduled a second meeting, and 
would not commit to a date for the final report. 
 
¶11. (SBU) Despite the lingering uncertainty, organized retailers 
anticipate good returns on their investment in UP.  Mayawati 
recently announced that she has decided in principle to impose the 
Value Added Tax (VAT) that is already in place in every other state, 
and Spencer's Kumar thinks this will make all the difference.  If UP 
implements the VAT over expected protests from traders' unions, 
Kumar believes that Mayawati will quickly realize the enormous 
income UP could get from organized retailers and will put in place 
more retail-friendly policies, opening the door to the most populous 
state in India. 
 
RELIANCE SEEN AS A BRUTE AND A BELLWETHER 
--- 
 
¶12. (SBU) Reliance seems to come up in any conversation about retail 
these days, as almost all of Econoff's contacts mentioned the 
indigenous giant, most in a grudgingly admiring way.  Toshniwal said 
that the Reliance conglomerate has a history of targeting and 
knocking out small competitors and entered into grocery retail with 
the same designs.  He felt Reliance opened with far too much fanfare 
 
NEW DELHI 00004801  003.2 OF 003 
 
 
and advertised prices that small retailers would find "predatory." 
He said that Pantaloon, by contrast, was not trying to acquire 
existing market share, but striving to expand the market.  Chauhan 
found Reliance's entry strategy flawed, in that they opened stores 
before developing relationships with farmers or initiating any of 
the supply-chain improvements that would yield higher market 
realization for them. 
 
¶13. (SBU) In UP, Reliance has fired nearly 1000 workers and plans to 
terminate all of its leases.  Yet Hemanth described Reliance's 
firings as tactical, a move intended to communicate to the 
government that a policy unfriendly to modern retail was 
unacceptable and would preclude employment options. 
 
FDI:  JUST A QUESTION OF WHEN AND HOW 
--- 
 
¶14. (SBU) All sources concurred that the Center will allow FDI in 
multi-brand retail within five years, but the exact timing is 
uncertain.  Hemanth does not expect it in the next two years, except 
perhaps for non-sensitive goods like sports equipment and consumer 
electronics.  Purnendu Kumar said that whenever the next government 
comes into power, it will permit FDI in multi-brand retail. 
 
¶15. (SBU) Hemanth emphasized to Econoff that any new policy allowing 
FDI will come with riders, such as limits on the locations of 
outlets and on the number a company can have in a given area. 
Shrivastava said that the government should and probably will 
require international players to procure a certain percentage of 
their merchandise locally. 
 
¶16. (SBU) Nearly all of Econoff's sources were optimistic about what 
FDI will do for multi-brand retail.  Spencer's Arora and Kumar 
expressed their support, saying that foreign players will bring in 
new technology, best practices, and, most importantly, new 
strategies for increasing consumer spending.  Arora estimated that 
the Indian market can easily support 10 to 15 large players. 
Technopak's Kumar predicted that the four major Indian retailers 
down the road will be Reliance, the Aditya Birla Group, Pantaloon, 
and Spencer's, and he thought that they would coexist comfortably 
with Tesco, Wal-Mart, and other foreign companies, although he 
speculated that Spencer's and Pantaloon might sell out. 
 
COMMENT: TRY FOR A RIPPLE, BRACE FOR A WAVE 
--- 
 
¶17. (SBU) India's billion consumers, by and large, do not need 
convincing that more options and better prices are in their 
interest, and as Purnendu Kumar noted, most Indians do not care 
whether they shop at an Indian or foreign-owned store.  Companies 
should first emphasize the benefits they can offer to farmers and 
others who stand to gain from improvements in agri-retail 
infrastructure.  As Hemanth put it, the most persuasive case for 
organized retail is that it improves GDP, increases employment 
opportunities, and reduces the urban-rural divide.  Once stores are 
up and running, retailers who have met fairly little resistance, 
such as Spencer's and the Aditya Birla Group, have sought 
differentiation through product variety and quality rather than 
through price, which small retailers seem to see as less 
threatening. 
 
¶18. (SBU) Regardless of how quiet entry might be, however, U.S. 
companies should expect some resistance, which is a cost of doing 
business in India.  Toshniwal said that based on his experience 
working in the U.S. office of Coca-Cola, he thinks American 
companies are oversensitive and need to recognize that things work a 
little differently in India.  U.S. companies that agree to the terms 
of the Indian experience will have the best chance of establishing 
themselves quickly once the GOI approves FDI.  End comment. 
 
MULFORD