Walmart CEO Doug McMillon (left) and Flipkart co-founder and CEO Binny Bansal shaking hands at an event in Bengaluru, as a deal was announced for Walmart to buy a stake in Flipkart. Image Credit: AFP

Dubai: Did Walmart just place all of its India hopes in the Flipkart basket … even if a $16 billion (Dh58.7 billion) one? Did the world’s largest grocery retailer finally decide that online is the only way to go about breaking into India’s retail space worth an estimated $950 billion?

Walmart has been no stranger to India. It struck an alliance with an Indian partner (Bharti Enterprises) in 2007 to try its hand in the brick-and-mortar marketplace. The partnership was subsequently terminated, but Walmart retained the “cash & carry” store network it had put in place across cities.

But after a decade of trying to get something more than a foothold in an exceptionally difficult marketplace — and where even new regulations can get outdated in no time — no one would have faulted Walmart if it felt enough was enough. That it was better off chasing other markets than hoping to ever turn things around in India.

Well, that was before it unveiled the $16 billion mega deal earlier this month to acquire 77 per cent in Bengaluru-based Flipkart, one of two online retailing giants in India. (An entity going by the name of Amazon is the other …) Even then, Walmart insists that its plans for India will run on two tracks — the online one provided by Flipkart and the cash & carry network it operates directly and which will be built up further.

“We currently operate 21 cash & carry stores in 19 cities across nine states (and) opened first fulfilment centre in India in November 2017,” said a Walmart spokesperson. “We plan to open 50 more over the next few years.

“Walmart directly employs around 4,000 associates in India, and we estimate that each new store opened creates about 2,000 direct and indirect job opportunities.

“We expect the (Flipkart) transaction to create millions of jobs through development of supply chains, commercial opportunity such as supplier development, the “Make in India” initiative and direct employment.”

Sweeping regulatory changes

Walmart’s nod to “Make in India” — a favourite theme of the Narendra Modi government — should go down particularly well. Because, finally, Indian authorities seem willing to make the sweeping regulatory changes that its retail sector so desperately needs. Recently, it allowed international retailers to have 100 per cent ownership in single-brand stores within India.

This could, many hope, be extended to multi-brand retailing as well. Even in the online shopping space, any loosening of the regulations would be welcome for overseas retailers.

For instance, current rules stipulate that all foreign-owned e-tailers should operate as “marketplaces”, where they only provide the platform for others to sell. They cannot directly source or sell any merchandise. So, it’s a marketplace that Amazon operates in India and so does Flipkart. Amazon India is a wholly-owned subsidiary of an Amazon holding company registered in Singapore.

Now, those are the regulatory requirements that could either be done away with or diluted.

“The Indian government is mulling a further easing of FDI (foreign direct investment) norms in the retail sector, wherein retailers can source and sell locally-made goods on their own account,” said Anuj Puri, Chairman of Anarock Property Consultants and a former head of JLL India.

“This policy change will also allow foreign retailers to open wholly-owned stores in India for selling only “Made in India” products. This, if implemented, will be a major boost for the “Make in India” initiative of the government — and eventually domestic manufacturers — leading to creation of more jobs.

“Currently, India allows 100 per cent FDI in e-commerce businesses … subject to certain restrictions. Due to some of these restrictions, Walmart was earlier unable to enter the Indian retail space. To not lose out on this vast retail market, the Walmart-Flipkart deal was the obvious choice for the former to make its entry into the Indian B2C (business-to-consumer) space.”

Foreign exposures

The big question — a $950 billion one, so to speak — is whether the Indian government will move fast enough to make those much-needed changes on foreign exposures in Indian retail? The next general elections are just a year away and it could be that the government might hold back from passing sweeping reforms now. As with anything and everything in India, there can be no separating politics from economic considerations.

But the Walmart deal on Flipkart — and at a price tag of $16 billion and more to come — could yet convince Indian authorities to get moving on regulatory changes now rather than hem and haw for another year or more.

For the moment, Walmart and Flipkart’s priorities could be more short-term. First up, win regulatory approval for the deal, before the year is out.

That, sources say, should be a relative cakewalk. “Considering that 100 per cent FDI is allowed in marketplace based eCommerce model, regulatory approvals should be forthcoming,” said Sudish Sharma, Executive Partner at the law firm of Lakshmikumaran & Sridharan.

“Where a deal exceeds the prescribed threshold, prior approval from the Competition Commission of India (CCI) is required. In the present case, CCI will be required to evaluate the effect of the Walmart-Flipkart deal in the market and whether the same will result in a dominant position of Walmart in India. “Considering Flipkart is the leading e-commerce operator, followed by Amazon in the second position, a deal between Flipkart and Walmart (being a new entrant) may likely receive CCIs’ blessing.

“It would have been relatively difficult to receive CCI approval with Amazon acquiring Flipkart … considering the acquisition may have resulted in a dominant position in the market.”

India’s cumbersome rules on foreign investments in eCommerce

* Foreign direct investment of up to 100 per cent is permitted under automatic route only in B2B e-commerce and not in B2C.

* FDI is allowed only in a marketplace-based model and not permitted in an inventory-based model, where the business owns the inventory of goods and services and directly sells the same to consumers.

* An e-commerce entity is not permitted to undertake more than 25 per cent of the sales value, in a financial year, through its marketplace from one vendor or their group companies.

* An e-commerce entity is not allowed to directly or indirectly influence the sale price of goods and services and shall maintain a level playing field, according to Lakshmikumaran & Sridharan, the law firm.