Opening for Business in India: Retailers' Options

I. INTRODUCTION India's retail market is currently valued at over $250 billion, and reports indicate it is growing at a rate of ten percent each year. (1) This tremendous growth is encouraging even Mickey Mouse to enter India's retail market. (2) Because of recent policy changes encouraging foreign investment, Disney and many other retailers have leapt at the opportunity to enter the market. (3) However, foreign retailers are still limited in their ability to operate in India because Indian law strictly regulates foreign participation in its retail market. (4) As foreign retailers formulate their plans to expand into India, they must consider the allowable modes of operation and identify which of these options best suit their business needs. (5) This Note evaluates the various ways in which foreign retailers may operate retail stores and manufacturing facilities in India. (6) Part II of this Note introduces some of the reasons foreign retailers are so interested in India. (7) Part III discusses the legal obstacles foreign retailers face and recent developments in Indian law intended to open the country's doors to foreign businesses. (8) Part IV discusses the allowable modes of operation for foreign retailers. (9) Part V suggests the optimal choices for foreign retailers to operate retail stores and manufacturing facilities in India. (10) II. INDIA'S ECONOMY--WHY FOREIGN RETAILERS ARE INTERESTED India has one of the largest economies in the world. (11) Its consumer market stands at an estimated three hundred million people and is growing at approximately eight percent per year. (12) Currently, organized retail sales comprise only three percent of India's $250 billion in total retail sales. (13) However, organized retail is rapidly growing, and some analysts predict it could account for as much as thirty percent of India's total retail market by 2010. (14) This has led some to speculate that [b]eing in India today is like being in the [U. S.] in the wild days of the dotcom era. (15) Foreign retailers must initially consider two issues before expanding into India: (1) whether India presents a viable market for their products and (2) whether the opportunity in India exceeds that of other foreign markets. (16) First, cultural differences present one obstacle to the marketability of foreign products because Indian consumers wish to maintain the uniqueness of their culture and foreign brands may not suit their tastes. (17) However, foreign retailers who modify their products and services to cater to India's unique culture have enjoyed success. (18) Second, foreign retailers must consider whether another country would be more suitable for their expansion plans. (19) For instance, Chinese workers are more productive than their Indian counterparts and China has a much more developed infrastructure. (20) However, certain other factors such as lower minimum wages and lower levels of corruption, as well as India's potential for growth, lead some to anticipate that India will overtake China as the business leader in Asia. (21) Although observers can only speculate on whether India will enjoy the success some predict, many well-established, multinational companies already operate in India and continue to further expand their presence. (22) III. BACKGROUND OF INDIAN LAW AFFECTING FOREIGN RETAILERS India gained independence from Great Britain in 1947 and immediately placed heavy restrictions on foreign trade in an attempt to improve its economy. (23) As a result, India's share of world trade shrank. (24) In July of 1991, the Indian government introduced a new policy to address the international community's lack of confidence in its economic viability and removed some of the obstacles blocking foreign investment. (25) However, the Indian government did not allow foreign retailers to operate stores in India until January 2006, and even then it left a number of restrictions in place. …