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Retail FDI in the cross hairs
The government’s backtracking on opening up FDI in retail shows that its heart and mind are at loggerheads. Once the Cabinet cleared the policy, it was expected of the government to stand firmly behind it. Instead, its lack of conviction and half-hearted support to the policy has brought the entire process to a standstill
Issue Date - 22/12/2011
The flip-flop on FDI policy in retail is proving to be a major contretemps for the Congress-led ruling UPA-II government at the Centre. Barely days after the government announced on November 24 that it had approved 51% and 100% FDI in multi-brand and single brand retail respectively, West Bengal Chief Minister Mamata Banerjee took the Mickey out of the government’s claim by declaring that the policy has been put on hold ‘until a consensus is evolved’. With the government looking likely to back-pedal on its FDI stand, India Inc. came out all guns blazing and attacking the government for going weak at the knees. Most corporate honchos opined that rolling back the FDI policy on retail would be most unfortunate even though they agreed that the government should have chosen a more opportune moment for announcing the policy.

The decision to open up the retail sector to global investors through foreign direct investment means that global retailers such as Wal-Mart, Carrefour, Tesco and others can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up to 51% equity. But there are quite a few strings attached to safeguard national interests and allay fears of market exploitation by foreign retailers. The rules stipulate that at least half of the FDI should be made in back-end infrastructure such as in setting up cold-chains and warehousing, the minimum FDI in any multi-brand retail project should be $100 million, state governments can prohibit FDI in retail in their states if they wish to, stores can be set up only in cities with a population of at least 1 million and at least 30% of the value of manufactured items procured should be sourced from Indian small and medium enterprises.

Despite the riders, the proposed move hasn’t gone down well with many sections of the political class and their constituencies. Voices against the decision have also been aired from within the Congress. Opposition parties (including the BJP, which had advocated for a similar policy in 2004) and small traders have expressed apprehensions that deep discount stores of transnational corporations will drive out street vendors and neighbourhood kirana stores out of business, thereby endangering their livelihoods. “Foreign investors with deep pockets entering this segment will have an adverse impact on our domestic retail sector, which is growing,” says senior BJP leader Sushma Swaraj, adding that the decision will decimate competition and involve a loss of jobs, both in the manufacturing and services sector. “These jobs will be lost in the name of eliminating middlemen,” Sushma tells B&E.

For the government, opening up FDI in retail was an opportunity to salvage its image, which had been sullied by serious charges of graft and policy paralysis. That chance, if ever there was one, seems to have been lost. According to sources familiar with government thinking following the uproar and furore created by political parties in the wake of the announcement on FDI in retail, the government was already on track to potentially dilute certain provisions of the policy. But what is befuddling is why the government chose to bring the discussion on FDI in retail to Parliament when it actually did not need to. The clearance of this policy does not require parliamentary approval. As per the consolidated FDI Policy of India, the Ministry of Commerce & Industry is only required to bring out a press note indicating its intent, following which the Reserve Bank of India brings out a notification. Since the decision to allow 51% FDI would only be a change of rule under the Foreign Exchange Management Act (FEMA) and not in the legislation, it did not require any approval from the Parliament.

Why then did Commerce Minister Anand Sharma choose Parliament to make this announcement? If the government actually wanted to push the new rules through, it could have easily chosen a more convenient time and place. Moreover, despite the safeguards that the government claims to have put down in the policy, there is still a lot that needs to be done to make the policy yield positive results.

Calling the government’s move ‘suicidal’, economist and political commentator Suvrokamal Dutta says that the policy has been spelt out in accordance with the interests of the West. “By opening up the retail sector in India, which has such a huge middle class population, Western markets are looking for another dumping ground for their goods.” “India,” says Dutta, “is the second biggest market for the US and UK after China and American and European MNCs need this market to overcome recession, their negative growth rate and their job losses.”

Commenting upon the undue urgency with which the decision to open FDI in retail was brought forward without much discussion, eminent agriculture scientist and Father of the Green Revolution, MS Swaminathan tells B&E, “I think the government feels it has the right to take decisions on the ‘reform agenda’ as they call it. But the retail FDI issue affects poorer sections of the society with millions of people involved in small retail business and small scale farmers – this needs to be seriously examined.” According to Swaminathan, agriculture in India is viewed by the urban people from their own point of view of food security. “However there are issues of livelihood and food security for farmers. With diminishing land resources & disenchantment of the farming community with the agriculture economy, the decision on FDI in retail should be discussed well.” Several other experts echo Swaminathan’s sentiments on FDI in retail. They believe that in order to make this policy truly work in the interest of the nation, there are several measures with respect to land, agriculture, food et al which need to be addressed before opening up retail to foreign investors.

While the sound and fury on FDI in retail continues to rage, the policy looks all set to undergo another change in provisions, if not pushed into limbo altogether. But even if a new version is able to pass muster with the political class, it remains to be seen how many foreign retailers will actually find it viable to set up shop in India. Till then how well the policy, if and when it is introduced, works out will remain a mystery.

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