Ikea 'bargains' its way into India: what does this mean for the rest?

The government’s hurried clearance of Swedish furniture maker Ikea’s India proposal is probably the much-needed shot in the arm for Indian markets with the Nifty breaching the 6100 mark today after two years.

Finance Minsiter P Chidambaram has been on a reform drive for the past month in order to shore up FII investment in the country before he presents the Budget next month.

While the move has sent retail stocks soaring this morning, it remains to be seen if it will kick off the entry of many more international players in single brand retail in India.

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Even though Ikea’s proposal was seen as an acid test for other foreign retailers waiting in the wings, at least a couple more big-ticket investments are required before others take the plunge since big retail groups are still worried about political resistance.

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The foreign investment promotion board only fully cleared Ikea’s proposal to invest Rs 10,500 in India seven months after signing the deal with the Swedish major. The board had earlier only permitted Ikea to invest Rs 4,200 crore to open single-brand retail stores. The company’s plans of setting up cafeterias at the stores had, however, hit a roadblock as the government was not clear about the format of these stores. However, with the final approval, Ikea can open cafes in stores too.

Though Commerce Minister Anand Sharma said Ikea can bring its colossal furniture outlets to India, industry experts have pointed out time and again that protracted negotiations it has endured will slow efforts to draw foreign investment to retail.

The furniture retailer was “able to bargain because they are the first,” Arun Kejriwal, director at Kejriwal Research & Investment Services in Mumbai told San Francisco Chronicle last week.

Despite the Ikea approval, there are a lot of riders like sourcing, investments levels, which are not very clear and may act as a deterrent.

Hence unless the regulatory framework improves, foreign retailers would continue to be cautious about India. Most international players have already put their India plans on the back burner given uncertainty in the political space since general elections are due in 2014.

Since the time the government notified 100 percent FDI in single brand retail foreign players have been slow on India investments with only nine proposals coming in. Of this, only Paver, Ikea and US’s fashion brand Fossil sought to come on their own with 100 percent FDI. Other foreign single brand players-American clothing brand Brooks Brothers and Italian jewellery company Damiani - want to set up shop in India with local partners.

Foreign interest only picked up in the last one month once the government revised its earlier policy on allowing FDI in single brand retail with French cookware maker Le Creuset SA, Thailand-based luxury goods retailer Lotus Arts de Vivre and French sportswear company Decathlon SA applying for permission to set up their own brands in India, according to this Wall Street Journal report.

“Those who have exposure to India and are ahead of the curve and will be quicker to move, and those who don’t will now look actively. But this definitely sends out strong signals and greater confidence for those looking at applying themselves to the Indian market,” Amitabh Mall, partner and director at Boston Consulting Group, is quoted as saying by Mint today.