The government has substantially liberalized the policy environment relating to foreign direct investment [FDI] thereby bolstering the prospects of increasing foreign fund inflows. But, that is hardly true for investment in retail which is the fastest growing sector.
The biggest stumbling bloc is the policy maze which gives too many confusing signals and gives scope for varied interpretations. Even worse, it gives too much of ‘discretion’ to the bureaucrats in deciding as to who would be allowed and on what terms. It tantamount to bringing the license raj through the back door.
For the purpose of FDI, the retail sector has been divided in to several classes which is completely out of sync with international practice of treating retail as one ‘homogeneous’ sector. Thus, in India, we have single-brand retail [SBR] and multi-brand retail [MBR]. Even within SBR, there are three sub-categories viz., whole-sale cash and carry, 100% SBR stores and on-line stores.
Within MBR, there is the ‘physical’ format or what is euphorically called ‘mom-and-pop’ store. Then, we have the ‘online’ format which as per recently notified guidelines by DIPP [department of industry policy and promotion], has two sub-categories viz.,‘market-place’ model and ‘inventory’ based model.
The stipulation in regard to FDI is different for each of the sub-categories. In whole-sale cash and carry or business-to-business [B2B]/sale to wholesalers, 100% FDI is permitted without any conditions. In other words, an MNC can set up a ‘fully owned’ shop in India for making supplies to wholesalers [various institutions making bulk purchases are also covered].
As regards SBR, 100% FDI is permitted in this segment subject to the company sourcing 30% of its requirements from local vendors. The guidelines have recently been amended to grant exemption from this condition if investment is made in a high-tech area [DIPP has been asked to formulate guidelines as to what constitutes high-end technologies]. A foreign company already operating a fully owned SBR store can also latch on to ‘online’ sales.
Till now, a foreign company which operates in all three segments viz., SBR, wholesale/B2B and online operations was required to operate under distinctly separate entities for each thereby making the business even more cumbersome. Recently, in the case of German sports goods maker Adidas, the Centre has permitted these operations under one entity; however, it will have to keep separate accounts for different stream of business.
In the MBR segment, 51% FDI is allowed but with a plethora of riders including 30% local sourcing requirements, minimum investment of US$ 100 million and prior approval of the state where the retail shop is contemplated to be set up. This effectively prohibits foreign investment in this area. During the last 4 years [since the policy was approved in 2012], except Tesco which has a joint venture with Tata’s Trent, there has not been any FDI in MBR.
Meanwhile, in budget for 2016-17, finance minister, Arun Jaitely announced 100% FDI in food retail. Here again, the permission to invest will be subject to a host of conditions such as selling only those products which are locally processed/manufactured, using agricultural produce sourced only from Indian farmers. Besides, 25% of investment must necessarily go for creation of agri-infrastructure viz., irrigation, farm machinery/implements etc.
In the e-commerce [or online sales] segment of MBR, recently, the government notified guidelines to allow 100% FDI in market-place model [an IT platform on a digital and electronic network where sellers and buyers conduct transactions]. The permission is subject to several conditions viz; not more than 25% sale by a single vendor, no advertisements or discounts etc. However, in the ‘inventory’ based model of e-commerce where the company also owns the inventory of goods and services, FDI is prohibited.
There are several contradictions and inconsistencies in the policy environment. It is ironical that 100% FDI is allowed in whole-sale cash and carry but when it comes to retail, investment is restricted to 51% in MBR with onerous riders. Even SBR though, 100% FDI is permitted, the same is subject to local sourcing requirements. To let an MNC sell to wholesalers without any encumbrances and put conditions when it comes to their direct retailing is anomalous!
Such a dispensation does not even serve the objective [though not a laudable one] of curbing the monopoly of MNC which is purportedly the intent of putting riders on their entry in retail. Even as they come in vide B2B/cash and carry route, consumers do not get the benefit of lower price as a few wholesalers/institutions who get their franchisees exploit their privileged status to the hilt.
The recent government decision to dispense with local sourcing requirements for FDI in high-tech areas of SBR has opened up a Pandora box. It has led to dozens of claimants seeking exemption. This will only perpetuate the discretionary powers of bureaucrats making the system vulnerable to charges of unfair treatment and discrimination by those who are denied this exemption.
Within the MBR sector, even as FDI in physical format is effectively barred [courtesy, onerous conditions], it is permitted through backdoor vide online sale. This is camouflaged under so called market-place model where the e-commerce company does almost every thing that a seller needs to do for executing a sale transaction and yet gets away with 100% FDI. Even such backdoor entrants are not allowed to live in peace due to a plethora of riders.
In yet another glaring instance of inconsistency, the government has allowed 100% FDI in retailing of food even while continuing with 51% FDI in MBR that too with riders. Food constitutes nearly half of the retail business. It defies logic to keep rest of retail trade outside even while permitting 100% FDI in food.
The present highly convoluted policy dispensation in regard to FDI in retail will lead us no where. It will neither enthuse MNCs to come in nor help promote the cause of “Make-in-India”. And, it won’t help us create jobs and increase people’s income. It does not gel with reform credentials of Modi – government.
Quite in line with prime minister’s focus on improving ease of doing business, the government should allow 100% FDI in retail without making any artificial distinctions [single brand or multi-brand; on-line or off-line] and without any pre-conditions. This will give a big boost to development and create jobs for millions.