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India retail plans at risk

Official cost for key licences is typically accompanied by expenses in the form of bribes

Image Credit: REUTERS
A sales assistant arranges clothing at a V-Mart store in New Delhi. India is the next greatfrontier for global retailers, a $500 billion market growing 20 per cent a year.
Gulf News

Mumbai: Hong-Kong entrepreneur Ramesh Tainwala spent 18 months operating branded clothing retail stores in India before deciding it was impossible to succeed without paying bribes.

Tainwala, a 55-year-old expatriate Indian, owns Planet Retail, which held the India franchise rights for US fashion labels Guess and Nautica as well as UK retailers Next and Debenhams. He sold the brands last September to various Indian businesses.

“Right now it’s not possible to do business in India without greasing palms, without paying bribes,” said Tainwala, who is also luggage maker Samsonite’s president for Asia Pacific and West Asia. Tainwala said he himself refused to pay bribes to licensing officials, though that could not be independently confirmed.

India is the next great frontier for global retailers, a $500 billion (Dh1.8 trillion) market growing 20 per cent a year. For now, small shops dominate the sector. Giants from Wal-Mart Stores Inc to IKEA AB have struggled merely for the right to enter, which they finally won last year.

But a daunting array of permits — more than 40 are required for a typical supermarket selling a range of products — force retailers to pay so-called “speed money” through middlemen or local partners to set up shop.

In interviews with middlemen and several retailers, Reuters found the official cost for key licences is typically accompanied by significant expenses in the form of bribes. The added cost erodes profitability in an industry where margins tend to be razor-thin. It also creates risk for companies by making them complicit in activity that, while commonplace in India and other emerging markets, is nonetheless illegal.

That creates a handicap for foreign operators such as US-based Wal-Mart, the world’s biggest retailer, and Britain’s Tesco Plc and Marks and Spencer Plc, which must comply with anti-bribery laws in their home countries even while operating abroad.

A Wal-Mart spokesperson said the company is strengthening its compliance programmes, part of a global compliance review that has cost more than $35 million over the last 18 months. IKEA, which is awaiting final approval to enter India, has started assessing the market, a spokeswoman said, adding the group has “zero tolerance” for corruption in any form.

Harassed for money

Retail is especially prone to bribery because stores sell multiple types of merchandise, which in India increases the number of licences and permits needed — a legacy of the so-called “Licence Raj” that was largely dismantled during the country’s early 1990s economic reforms.

The World Bank’s Ease of Doing Business survey ranks India 173rd out of 185 countries when it comes to starting a business, behind Malawi, Niger, Sudan and Guatemala. Transparency International in 2012 ranked it 94th out of 174 countries on its corruption table — a fall from 72nd five years earlier.

“Even for a simple thing like putting up signage in front of your store you are harassed for money,” said Tainwala. “There are many bodies regulating that and the permits needed to set up one shop are baffling.” The Licence Raj, he said, substantially increases costs in a market where sluggish consumer demand, high rentals and a depreciating currency for over a year have made it hard for retailers like him to operate profitably. He plans to return when there is more order in the way business is done.

Ais Kumar, head of the western region for the Food Safety and Standards Authority of India (FSSA), acknowledged that graft exists across government ranks and departments. Many government departments also have staff shortages that cause delays.

“These licences are required for compliance and safety and not because the government wants to delay or complicate things for anyone. It’s the law of the land and it must be followed,” he said, adding the government is striving to put licensing systems online to streamline the process and make it more transparent. Checks with three retailers, however, showed the online forms still need to be physically delivered to the respective licensing departments.

Under the table

Permits needed to open a store range from the mundane, such as a trade licence, to the petty: lighted shelves require a separate permit, and even a shop window needs a licence.

Want to play music in the store? That requires a licence. So does selling cosmetics or providing valet parking.

A convenience store that sells basics such as milk, vegetables, cereal, bread, eggs, meat and baby food will require a minimum of 29 licences from nearly 20 different authorities, according to a list of licences compiled by the Retailers Association of India and obtained by Reuters.

Those include a food licence; a licence for sale, storage and distribution; a food-handler’s certificate; a licence for milk products and another for frozen non-vegetarian food. All those licences come from the state-level FSSA, but require separate applications.

“In India, you don’t need to ask retailers if you need to pay bribes,” said Punit Agarwal, CEO of Promart, a mid-sized multi-brand clothing retailer. “It’s known. Here you have a price tag for everything.”

— Reuters