Held Up by Red Tape and Graft

MUMBAI â€" The 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.

Mr. Tainwala, a 55-year-old expatriate Indian, owns Planet Retail, which held the India franchise rights for the U.S. fashion labels Guess and Nautica and the U.K. retailers Next and Debenhams. He sold the brands last September to Indian businesses.

“Right now it’s not possible to do business in India without greasing palms, without paying bribes,” said Mr. Tainwala, who is also president for Asia Pacific and West Asia for the luggage maker Samsonite. Mr. Tainwala said he had 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 market growing at 20 percent a year. For now, small shops dominate the sector. Giants like Wal-Mart Stores and Ikea won the right to enter the market only last year.

But a daunting array of permits â€" more than 40 are required for a typical supermarket selling a range of products â€" pushes 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 crucial licenses was 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 like the U.S.-based Wal-Mart, the world’s biggest retailer, and the British retailers Tesco and Marks and Spencer, which must comply with anti-bribery laws in their home countries while operating abroad.

A Wal-Mart representative said the company was strengthening its compliance programs, part of a global compliance review that has cost more than $35 million over the past 18 months. Ikea, which is awaiting final approval to enter India, has 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 â€" a legacy of the so-called License Raj that was largely dismantled during the country’s economic overhaul in the early 1990s.

The Ease of Doing Business survey by the World Bank ranks India 173rd among 185 countries when it comes to starting a business, behind Malawi, Niger, Sudan and Guatemala. In 2012, Transparency International ranked it 94th among 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 Mr. Tainwala. “There are many bodies regulating that and the permits needed to set up one shop are baffling.”

The License Raj, Mr. Tainwala said, substantially increases costs in a market where sluggish consumer demand, high rent and a currency that has depreciated for more than 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, acknowledged that graft existed across government ranks and departments. Many government departments also have staff shortages that cause delays.

“These licenses 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.

He added that the government was 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 needed to be physically delivered to licensing departments.

Permits needed to open a store range from the routine, like a trade license, to the trivial: lighted shelves require a separate permit, and even a shop window needs a license.

Playing music in the store requires a license. So does selling cosmetics or providing valet parking.

A version of this article appeared in print on May 7, 2013, in The International Herald Tribune.