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Window shopping for a right solution

The government must not dilute its FDI policy. It should instead ensure that foreign retailers help create better infrastructure. N Chandra Mohan writes.

india Updated: Jun 09, 2013 23:23 IST

Ever since the UPA government permitted 51% foreign direct investment (FDI) in multi-brand retail last September, not a single foreign investment proposal has been received. There are as many as 12-14 multi-brand players waiting for clarifications on the policy before they decide to roll out their operations, according to Diljeet Titus, partner of Titus and Co, that handled single-brand retailer Ikea’s entry into the country.

Ikea succeeded in whittling down the mandatory sourcing limit from small and medium enterprises. Multi-brand giants, too, were testing whether they could force the government to dilute its policy.

Now that the government has issued clarifications on FDI rules, will this development kickstart investment? The government’s compulsion is to attract more foreign investments. More of the stable FDI than the fair-weather friendly portfolio investments that surge in and out of the economy to finance its growing current account deficit or imbalance in trade and services with the rest of the world.

During the third quarter of 2012-13, this imbalance ballooned to $32.6 billion or 6.7% of GDP. Net FDI inflows of $2.5 billion funded only 8% of this deficit. Overall FDI equity inflows have declined by 36% to $22.4 billion in 2012-13.

The multi-brand retail story tells its own story why FDI is not coming in. The retail giants sought clarifications on whether they have to mandatorily source 30% from small and medium enterprises, whether they have to invest 50% in back-end infrastructure like cold chain, warehousing and so on over a three-year period and the political uncertainty of different states having the option to open up multi-brand retail to foreign investment.

The last is indeed a deal breaker of sorts as the main Opposition party, the BJP, has vowed to roll back FDI in retail if it is voted to power in various states and nationally in 2014.

The CEO of Tesco, Philip Clarke, met commerce and industry minister Anand Sharma last month. All that he said later on was that “I think it was important that we heard from the minister about some of our small concerns. There will be important points of clarification in the months ahead.”

Britain’s Tesco has a franchise agreement with the Tata’s for wholesale trade, which is likely to extend to multi-brand retail. Carrefour, the €80 billion French retail chain, is reportedly reviewing its investment plans if tough riders are not relaxed. Carrefour runs a fully-owned cash-and-carry business, with four wholesale outlets in New Delhi, Jaipur, Meerut and Agra.

According to the government, the mandatory sourcing requirement pertains to only manufactured and processed products and not fresh farm produce like fruits and vegetables. Foreign retailers can also source from the entire country, including from the states which choose not to allow FDI in multi-brand retail.

As for investments in back-end infrastructure, the entire investment of $50 million has to be an additionality. In other words, it entails only fresh investments than acquisition of existing back-end assets or stakes from an existing entity.

Will all of this be enough to attract FDI? Not necessarily, as there is bound to be intense lobbying for further clarifications in the days ahead. Effectiveness of the policy safeguards depends upon the way actual guidelines are framed and loopholes plugged. As attracting FDI inflows has become an independent objective of policy, there are obvious constraints on the government’s ability to inform the global retail giants to roll out their operations under existing laws.

Setting up back-end infrastructure is the biggest benefit of allowing FDI in multi-brand retailing. For this reason, there should be no question of diluting this crucial condition. This condition would have been more effective had it been placed on the total investment and on specific activities rather than a whole host of activities, felt Professor KS Chalapati Rao of the Institute for Studies in Industrial Development. The possibility cannot be ruled out of the guidelines being tailored to meet the foreign investors’ convenience.

Global retail giants cannot ignore a booming $500 billion retail market like India and are bound to make investments. While they lobby for better conditions, the government must exhibit more strategic intent.

FDI must help build the much-needed back-end infrastructure. Since there is no bar on accessing the domestic capital market, the deployment of local financial resources, however, may further reduce the effectiveness of this requirement, added Rao. This must not be allowed to happen as this reform will have little to show for itself.

N Chandra Mohan is an economics and business commentator based in New Delhi
The views expressed by the author are personal

First Published: Jun 09, 2013 23:21 IST