The good, the bad and the ugly of Walmart–Maharashtra deal

Shishir Asthana
Moneycontrol Research

A proud Chief Minister of Maharashtra Devendra Fadnavis tweeted that a Memorandum of Understanding (MOU) has been signed between his government and Walmart India for setting up 15 modern wholesale cash and carry stores in the state. The American retail chain will invest Rs 900 crore on these outlets which will generate 30,000 direct and indirect jobs.

Walmart already has 21 cash and carry stores in India out of which two are in Maharashtra – in Amravati and Aurangabad. The company had said earlier that they are keen on setting up 50 stores over the next 4-5 years.

One might think that at a time when few private players are investing, any such announcement is lapped up by politicians to showcase their pro-industry approach. However, in the case of Maharashtra-Walmart pact, there are other issues at play which would rightfully make any state proud.

The deal is the first one after the implementation of Goods and Services Tax (GST). For retailers GST is considered a boon as it reduces the need for setting up warehouses in every state, now that taxes are standardized. This helps them in economies of scale as they can choose to set up bigger warehouses in fewer locations.

Maharashtra, because of its geographical location is centrally placed and offers logistical benefits for the state. Good port, road and rail connectivity has already made the state a preferred location for companies in the logistics sector.

The dual advantage of GST and logistics has helped Fadnavis score over other states in attracting Walmart. As a sweetener Fadnavis has said that the proposal will be given a single window clearance to smoothen the implementation.

There are two key takeaways from the developments that have taken place. One is that states are competing aggressively among themselves to attract investment and create employment and are willing to shout from the top of the roof on their wins. However, the poorer states will have more difficulty in competing with the bigger ones, thus increasing the gap between rich and poorer states.

And second is that even as Indian companies are not willing to commit investments in India, foreign players are willing to bet on the country. Their experience across various countries and access to cheap funds is prompting their investment. Indian companies will have to put in more effort to play catch-up.

A general perception is that investments by companies like Walmart or e-commerce companies like Amazon do not benefit the economy and it is something that the state and Centre government should not be really proud of.

General perception is that most of the goods sold by these companies are sourced from abroad. This affects the manufacturing base in the country. The US itself has faced the impact of retailers where the manufacturing base of the country was eroded as companies like Walmart imported goods cheaply from countries like China.

However, in the recent tie-up between Walmart and Maharashtra government this will not be the case. Walmart already sources between 90-95 percent of its goods from local market, which is likely to continue in the new stores. However, the same cannot be said about tie-ups with global e-commerce players who continue to import.

Small and medium enterprises (SME) are anyway affected by GST and struggling to get their act together. Increased presence by e-retailers who through their buying power and international reach can procure a good from the cheapest source can make life tough for the SME players. SMEs are where most of the jobs are created.