‘Speed money’ puts the brakes on India’s retail growth

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 was 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 US$500 billion market growing at 20 per cent a year. For now, small shops dominate the sector. Giants from WalMart 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 licenses 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 was strengthening its compliance programmes, part of a global compliance review that had cost more than US$35 million over the last 18 months.

IKEA, which is awaiting final approval to enter India, had started assessing the market, a spokeswoman said, adding the group had ‘zero tolerance’ for corruption in any form.

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