Why India’s FDI Fight Is Far from Over

India's beleaguered coalition government prevailed in two key votes that will allow foreign multibrand retailers like Walmart and Tesco to open shop in the country. But the debate will likely continue

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Sajjad Hussain / AFP / Getty Images

Supporters of the Social Democratic Party of India protest the Indian government's decision to allow foreign direct investment in the retail market during a rally on Dec. 5, 2012, in New Delhi

India’s beleaguered coalition government won a major battle today, prevailing in two key votes in the nation’s Parliament that will allow foreign multibrand retailers like Walmart and Tesco to open shop in the country. The move to allow 51% foreign investment in multibrand retail stores helped end a two-year-long period of so-called policy paralysis when it was first announced in September but soon ran into trouble when then coalition partner Trinamool Congress (TMC) pulled out of the government to protest the measure. The opposition Bharatiya Janata Party (BJP), meanwhile, has been angling for a vote on the FDI issue for months.

The final stamp of approval from both the upper and lower houses this week is a big win for the United Progressive Alliance (UPA) government, which has been trying to get India’s lagging economy back on track. Anticipation of the government’s win pushed India’s stock market to a 19-month high on Wednesday. The ruling will be a boon for Prime Minister Manmohan Singh, who pushed the measure through in the face of strong opposition from allies, and it could help clear the way for more broader economic liberalization.

(MORE: How the Entry of Walmart and Big Retail Chains Will Change India)

But the FDI fight over is far from over. The decision whether or not to lay down the welcome mat for big-box global retailers has become an emotionally loaded debate about the country’s economic future. The government maintains that the reform will create some 10 million new jobs in the next three years, help farmers get better prices for their produce and will infuse new life into India’s tottering food-distribution system. “Wastage will go down, prices paid to farmers will go up, and prices paid by consumers will go down,” Prime Minister Singh said in a rare, televised address to the nation in September defending the government’s decision to introduce the retail reforms. “In a growing economy, there is enough space for big and small to grow. The fear that small retailers will be wiped out is completely baseless.”

Not everyone, however, buys the argument that the nation needs Walmart to reduce waste — or improve India’s economic prospects. Opponents say mega-retailers could devastate millions of small-businesses owners, turning India into what BJP leader Arun Jaitley called a nation of “sales boys and sales girls.” He and other critics argue that while FDI in retail may modernize the sector, the small traders it pushes out have no other employment opportunities in the absence of a social security system or a robust manufacturing sector that can absorb labor. “I favor foreign capital across the board as long as it creates jobs and adds value to the country,” says Mohan Guruswamy, a former adviser to the Finance Ministry and a distinguished fellow at the Observer Research Foundation. “FDI in retail, unfortunately, doesn’t create jobs. It displaces people by destroying small stores.”

(MORE: At World Economic Forum, Indian Business Elites Fret Over Country’s Future Growth)

It is impossible to say if and how foreign big-box stores will loosen the grip that small traders have on the market today. (Small traders control an estimated 90% of India’s $450 billion retail sector.) Singh and other supporters of the reform are quick to point out that the organized retail sector already present in India has not adversely affected small shops, whose numbers, according to government statistics, have seen a threefold increase in recent years. “There will be some losers,” says Ravi Aron, an associate professor of information and strategy at the Johns Hopkins Carey Business School and a senior fellow of the Mack Center for Technological Innovation at the Wharton School. “The traditional middlemen are the biggest winners of today’s retail structure. They will stand to lose much, and they are throwing every possible argument that they can against FDI.”

So are the opposition parties, who have seized on FDI as an issue that could weaken the ruling coalition in the months running up to national elections in 2014. The coming months will see the battle shifting from New Delhi to the states, who have the last say in whether they want to implement it or not. “It is not over,” said Shahnawaz Hussain, a BJP parliamentarian member, after the vote this week. “We will fight on the streets.”

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