INDIAN RETAIL ENVIRONMENT GROWS MURKIER

UNCLAS SECTION 01 OF 03 NEW DELHI 004076

SIPDIS

SENSITIVE
SIPDIS

USDA PASS FAS/OCRA/HIGGISTON

E.O. 12958: N/A
TAGS: BTIO EAGR ECON EINV IN
SUBJECT: INDIAN RETAIL ENVIRONMENT GROWS MURKIER

NEW DELHI 00004076 001.2 OF 003


SUMMARY
--------------


1. (SBU) The developments of the past two weeks in Uttar
Pradesh (UP) and Kerala have further complicated an already
volatile environment for retail investors. The UP government
ordered several newly opened retail outlets closed following
violent protests by traders, and Kerala is pushing for a
revision of a law that will tightly restrict retail
investment in the state. India,s central government has not
yet taken action in defense of big retailers, but Minister
for Agriculture, Food and Consumer Affairs Pawar said
publicly that permanent bans on retail operation might
violate the constitution. West Bengal has promised to
protect retail outlets, and Punjab has said that it welcomes
retail investors but will not give them free land. End
summary.

BACKGROUND
--------------


2. (U) This year has seen several attacks on organized
retail in India. In Ranchi, Jharkand, groups of armed street
vendors attacked three Reliance Fresh stores on May 12. On
May 24, another such attack occurred in Indore, Madhya
Pradesh, and then on August 18, the Forward Bloc organized a
raid on a Reliance Fresh store still under construction in
Kolkata. Playing on Gandhi,s "Quit India Day," the umbrella
organization India FDI Watch (www.indiafdiwatch.org),which
is affiliated with an American anti-globalization NGO,
coordinated "Quit Retail Day" rallies on August 9 in cities
throughout India. Protestors chanted slogans against
organized retail in general and foreign investment in retail
in particular. Wal-Mart made for a popular target after
signing a deal with Bharti earlier that week to open as many
as 15 wholesale outlets in India over the next seven years.


3. (U) While the small retailers and supply-chain middlemen
who stand to lose business to organized retail have found a
number of outspoken advocates, retail investors have received
some quiet support from high-end produce farmers, who get
higher return on their crops from organized retailers.
Farmers in West Bengal put up a roadblock to protest attacks
on Reliance Fresh outlets, and UP farmers have demonstrated
against the closure of Reliance Fresh stores in their state
(see paragraphs 4 and 5). (Comment: We expect retail chains
to get support especially from vegetable farmers located 250
kilometers or less from an outlet, the radius within which
Reliance has said it will purchase locally available produce,
as well as from middle-class consumers looking for lower
grocery prices. End comment.)

MAYAWATI PUTS HER FOOT DOWN...SORT OF
--------------


4. (U) Despite the protests and attacks, ambitious
retail-development plans for India marched ahead until big
retailers suffered a significant setback in UP on August 23.
Chief Minister Mayawati ordered organized supermarket
retailers in the state to close shop, purportedly to restore
peace following the ransacking on August 22 of new Reliance
Fresh and Spencer,s outlets in Lucknow and Varanasi. The
attacks were part of protests organized by the opposition
Samajwadi Party. The Chief Minister subsequently formed a
five-member committee, headed by Cabinet Secretary Shashank
Shekhar Singh, to evaluate the feasibility and impact of
organized retail in UP and report back within a month.


5. (U) The UP government stated that the order applied only
to stand-alone outlets, not to those located in malls. It
was unclear, though, whether the order applied throughout the
state or just to Lucknow and Varanasi. Densely populated
Noida and Ghaziabad raised particular concern. They lie
within UP borders, but they are essentially suburbs of New
Delhi and offer flourishing retail markets. Illustrating the
confusion, Reliance closed its doors in Noida at noon on
August 24 but reopened them four hours later, and Reliance
stores in each city have been operating since on an ad hoc
basis.


6. (U) Meanwhile, Spencer,s outlets have remained open even
in Lucknow. Vice Chairman Sanjiv Goenka of RPG, which owns
Spencer,s, indicated that the chain will not close unless

NEW DELHI 00004076 002.2 OF 003


the company receives an official communiqu from the
government. Goenka denied that Spencer,s outlets were ever
attacked by protestors, suggesting that the rumor might have
been spawned by competitors.


7. (U) The Federation of Indian Chambers of Commerce and
Industry (FICCI),the Confederation of Indian Industry (CII),
and the Associated Chambers of Commerce and Industry in India
(ASSOCHAM) have all spoken out against Mayawati,s decision,
arguing that the closures are bad for consumers, companies,
and farmers, who stand to get higher prices for their crops
by selling more directly to large retailers. Union Minister
for Food and Consumer Affairs Sharad Pawar has stated that
while preservation of law and order is within the purview
state governments, he does not see how UP could legally make
the closures permanent.


8. (U) Mayawati, however, insisted that the closure order
would remain in effect until she receives a report from her
committee, which will look at issues of location, licensing,
health, and of course law and order.


9. (U) On the same day the closures were ordered, Mayawati
scrapped the agricultural reforms she had announced on August

3. The abandoned policy would have allowed farmers to
contract with companies whose net worth exceeded INR 5
billion (USD 122 million). Mayawati intended the policy to
encourage large retailers to invest in UP,s rural areas, but
she altered course after a state-sponsored survey showed that
60 percent of farmers opposed the policy, another hit to
retailers, investment opportunities in the state. The UP
government did not offer any detail on which parts of the
policy farmers opposed, the reasons for their opposition, or
the government's methodology in conducting the survey.

INVESTORS SURVEY THE LANDSCAPE
--------------


10. (SBU) Reliance Industries has plans to invest USD 6
billion in organized retail in India, but they have now
announced that they will slow development in the states of
UP, Kerala, and West Bengal, which they now perceive to be
problem areas. A Reliance contact told Emboff that the
company will respond to recent developments by proceeding
cautiously with their plans, with a constant eye towards
law-and-order concerns, and fight bans or problematic
legislation in the courts, if necessary.


11. (U) Kerala,s communist government has justified
Reliance,s concern with a proposed reinterpretation of the
Essential Commodities Act that would bar the entry of
organized retailers into rural areas and limit operations in
cities. C. Divakaran, Kerala,s Minister for Food and Civil
Supplies, anticipates that a new state-level interpretation
will be formalized by the end of the year. Though the
Financial Express reported that the central government asked
both Kerala and UP for an explanation of their policies,
noting possible violation of the Indian constitution,
Divakaran indicated that Kerala,s government has received no
such request. Divakaran,s Ministry is also planning to
upgrade existing "ration shops" to help them compete with new
retail outlets.


12. (U) West Bengal's government, also communist, has taken
a different stance. On August 26, there were attacks
reported on the same Reliance Fresh outlet in Kolkata that
was attacked on August 18. Rather than ordering the closure
of retail outlets to restore peace, Chief Minister Buddhadeb
offered "full police protection and security to all Reliance
installations in West Bengal," per The Economic Times.


13. (U) The press has reported that Punjab might be the next
state to take action against organized retail, but the
working president of Punjab,s ruling Shiromani Akali Dal
(SAD),Sukhbir Badal, stated on August 28 that while SAD
opposes the concessions offered by the Congress Party leaders
who preceded his administration, the party supports
investment of any sort in the state and would not discourage
large retailers.


14. (SBU) Indeed, a contact at Wal-Mart told Emboff that
Punjab would be home to the first Wal-Mart-Bharti
cash-and-carry outlet, both because of the friendly

NEW DELHI 00004076 003.2 OF 003


government and because it is the home of Bharti head Sunil
Bharti Mittal. The contact added that Wal-Mart considers
press coverage of the Bharti pact "not too bad" so far, but
Wal-Mart is paying close attention to the retail environment,
as it will affect Wal-Mart's front-end partners.

COMMENT
--------------


14. (SBU) Whatever comes of the situation in UP, these
developments are likely to damage investor confidence in the
state. Mayawati,s Bahujan Samaj Party seems unwilling to
resist pressure from special-interest groups advocating for
small retailers, no matter the damage the investment climate
might incur or the opportunities farmers might lose. We
expect that Mayawati will at least make allowances for
organized retail in Noida and Ghaziabad, but if UP,s
committee yields anti-retail policy advice, intercession by
the central government on constitutional grounds would be
helpful in protecting the interests of retail investors.
That said, given the central government's tenuous hold on
power and the possibility of general elections in the near
future, it is doubtful that the Center will offer any strong
response on such a controversial subject.


15. (SBU) Buddhadeb,s actions are no guarantee of support
down the road for foreign companies. West Bengal's Chief
Minister has a record of soliciting foreign investment in
West Bengal, but the traditionally protectionist attitude of
Indian communists may still prevail in the state when the
delicate issue of FDI in retail comes into play.


16. (SBU) The protests to this point are no greater than
one would expect with such a dramatic potential shift in the
economic landscape, and they are largely occurring in less
progressive regions, whereas in New Delhi, Maharashtra,
Andhra Pradesh, and other progressive areas, people generally
recognize the benefits of organized retail and welcome its
development. It is also important to note that there are two
distinct drivers behind these protests. One is a fundamental
opposition to organized retail, as in the cases of some of
the isolated attacks by traders and the August 9 protests
orchestrated by an NGO laying the groundwork for its fight
against FDI in retail in India. The other is political
opportunism, as in West Bengal and UP, where opposition
parties arranged protests and attacks not on principle, but
because an opportunity to undermine the governing party
presented itself. End comment.


17. (U) Visit New Delhi's Classified Website:
http://www.state.sgov.gov/p/sa/newdelhi/.

MULFORD