In the budget for 2016-17, finance minister, Arun Jaitely had announced 100% foreign direct investment [FDI] in food retail. However, this is subject to the condition that the retailer will sell only food procured from farmers in India and processed locally.
Even as the guidelines in this regard are yet to be notified, meanwhile as per reports, the government is considering a proposal to allow 100% FDI in all goods ‘manufactured domestically’. The policy will be applicable to both offline [brick-and-mortar retailers] and online [e-commerce companies]. The idea is seriously flawed.
To put things in perspective, let us capture the broad contours of existing policy dispensation in regard to FDI in retail. For this purpose, retail is classified in two broad categories viz. single-brand retail [SBR] and multi-brand retail [MBR]. The policy is different for each and there is further differentiation for operators in online space.
In regard to SBR, 100% FDI is permitted [in both offline/online] subject to the company sourcing 30% of its requirements from local vendors. Last year, the guidelines were amended to relax this condition if investment is made in so called ‘cutting-edge technology’. However, full exemption will be available for first 3 years only and thereafter, it will be partial for 5 years on a sliding scale.
In MBR/offline/physical format [also known as ‘mom-and-pop’ store in common parlance], 51% FDI is allowed subject to 30% local sourcing, minimum investment of US$ 100 million and prior approval of the state where the store is to be set up.
In MBR/online segment, 100% FDI is allowed in ‘market-place’ – an IT platform on a digital and electronic network which acts as facilitator for sellers and buyers and provides support services viz. warehousing, logistics, order fulfillment, payment collection etc. This is subject to no more than 25% sale by a single vendor and no advertisement or discounts by the e-commerce company. However, in ‘inventory’ based model, where the company also owns the inventory of goods and services, FDI is prohibited.
The above guidelines are not conducive for attracting foreign investment. In SBR, despite 100% FDI, foreign investors are far from enthused because of onerous condition appended to it. Other than IKEA which got approval [2013] with 30% local sourcing, all potential entrants including the high profile Apple are deterred by convoluted rules regarding exemption from local sourcing in case of ‘cutting-edge technology’ [for how long this would be available 3, 4,5,6 years …. is left to discretion of bureaucrats].
In MBR/offline, during the last 4 years since, policy was approved [2012], except Tesco which has a joint venture with Tata’s Trent, there has not been any FDI. Operators in this segment are also at a substantial disadvantage vis-à-vis online players, courtesy 100% FDI – albeit in the ‘market place’.
This policy maze has also led to a scenario whereby online players owning inventory of goods, do everything that a seller does to execute the transaction and yet manage to get FDI albeit through the backdoor. They do so by camouflaging their activities under market-place model [through clever documentation engineering, all that they need show is that the stock is held by someone else].
In food, a mere announcement of 100% FDI won’t lead to any investment proposal in the absence of detailed guidelines which are yet to be notified. Even so, food processing minister’s refrain of tagging this to investment in agriculture infrastructure and sourcing of raw material from Indian farmers is a major irritant.
Now, the move to allow 100% FDI in all goods ‘manufactured domestically’ won’t make the policy environment any better. First, one is not sure whether it will come without riders. The experience of the past does not instill confidence.
Second, even if it comes without any pre-conditions, the requirement that ‘the store will sell only domestically manufactured product’ by itself is a huge stumbling block. This takes away from foreign owned store freedom to decide what to sell. Its choice will get restricted to what is available locally [this is much worse than 30% local sourcing under extant dispensation]. This will also be discriminatory vis-à-vis an Indian owned outlet which can also sell imported product.
Third, the proposal is being touted to be in sync with much trumpeted Modi’s “Make in India”. It presupposes that foreign company will set up facility in India to make products that it intends to sell from its store. The link is far-fetched to a point of being utopian. The investment decision depends on a host of factors including overall business environment and not just on its getting to set up a selling shop.
Fourth, the stipulation is also contrary to the principle of freedom in international trade. While, there can be no two opinions on encouraging domestic production, but that should be left to be determined by tariffs and industrial policy apart from inherent competitiveness of local production relative to import.
The government’s intent to allow 100% FDI in retail is laudable, but to do it only for domestically manufactured goods will be a non-starter. This should be avoided. Instead, the focus should be on lifting all curbs [local sourcing, investment limits etc] and dispensing with all classifications and sub-classifications.
It should allow 100% FDI in retail without making any artificial distinction [single brand or multi-brand; on-line or off-line] and without any pre-conditions. It will give a big boost to organized retail, eliminate multiple intermediaries in supply and distribution chain, reduce cost to consumers, expand markets and boost tax collections.
A collateral gain will accrue by way of ending a host of litigation pending in courts [that waste precious time of judiciary, bureaucracy and industry] all triggered by differential policy guidelines applicable to different segments of retail under extant dispensation.
Hope, Team Modi is listening!