In the budget for 2016-17, the union government had announced 100% foreign direct investment [FDI] in food retail – both offline and online. However, such investment was subject to retailer selling only the food procured from farmers in India and processed locally and undertaking investment in back-end infrastructure.
The Indian retail market is worth over US$ 650 billion of which food alone accounts for about 50%. The market is dominated by small grocery [or the so called mom-and-pop] stores. The organized retail constitutes less than 10% despite the private sector [albeit domestic] having made forays into retail for over two decades now. So, the opportunities for FDI in food are unprecedented.
In this backdrop, one would have expected a big surge in entry of foreign companies in food following its opening up. Yet, two years since, only a few proposals have been approved involving FDI of less than US$ 1 billion of which contemplated investment by Amazon.in alone is about US$ 500 million. An overarching reason for the lackluster interest is the riders on such investment.
The requirement to sell ‘locally’ produced food forecloses the import option – that would have enhanced the attractiveness of opening a foreign retail store. A further condition that it cannot sell any item other than food takes away the flexibility to improve margin which in food business per se are limited. The idea of letting such stores keep and sell non-food items was under consideration of the policy makers for a while but, eventually it did not favor with the government. The obligation to invest a certain percentage of FDI in back-end infrastructure in agriculture makes matters worse.
Meanwhile, a recent clarification issued by the department of industrial policy and promotion [DIPP] – the nodal authority in the ministry of commerce to formulate the guidelines regarding trade and investment matters – has stated that ‘the foreign retailer will maintain separate accounts for direct retailing in food and also have dedicated facilities for storage and warehousing distinct from such infrastructure used for other activities/operations’. However, ‘other logistics and infrastructure such as handling and transportation could be common’.
This has only added to the confusion and increased uncertainty of the policy environment. When, available infrastructure can be used for a variety of activities resulting in optimization of resources and cost reduction, there is no justification for imposing such restrictions. There is an underlying reason behind such stipulation.
The foreign investment in multi-brand retail [MBR] sans food is governed by a different policy dispensation. In 2012, the then government under UPA-II permitted 51% FDI in MBR subject to minimum investment of US$ 100 million [50% of this should be in building back-end infrastructure], investor sourcing 30% of the requirements locally from small and medium enterprises [SMEs] and prior approval of the state. Modi – government continued with this policy regime.
Further, in 2016-17, it allowed 100% FDI in the so called ‘market-place’ model for e-commerce – an IT platform where sellers and buyers conduct transactions [here, a company gets a fee for offering its services such as raising invoice, arranging delivery, collecting payment, stocking goods etc]. This permission is subject to conditions viz. not more than 25% sale by a single vendor, no advertisements or discounts etc. However, in the ‘inventory’ based model where the company also owns the stock of goods, FDI is prohibited.
Already, several players including Amazon are operating in the e-commerce segment under ‘market-place’ model. However, to ensure that they do not to get into directly selling to consumers wherein this is barred as in MBR e-commerce [or allowed up to 51% as in MBR offline but subject to riders], the DIPP wants to put ‘food’ where it is permitted in a distinct and dedicated compartment.
To do the policing and ensuring that warehouses/stores are used only for retailing of food is a herculean task. Besides, this would mean resurrection of license raj and is completely out of sync with the liberal ethos of present government necessary for improving the ease of doing business. It will breed in nepotism and corruption by giving too much of discretion in the hands of bureaucrats.
This also raises doubt whether the government is really serious about enforcing the rule? Had it been so, then all of the logistics and infrastructure [not just storage/warehousing] should have been kept dedicated for food. The fact that DIPP has allowed some facilities to be common to food retailing and other items would give a clear indication of its willingness to let the likes of Amazon to get into direct selling of all items albeit through the backdoor.
Pertinently, other e-commerce companies such as Flipkart [in which Walmart has recently picked up 77% stake] are also flouting norms for 100% FDI under ‘market place’ model. They are engaged in direct selling to consumers but camouflage it as ‘market-place’ through clever documentation, e.g. by showing that they do not own the stock. No policing is being done to check it. The loopholes in the policy for 100% FDI in food retail are a continuation of this trend.
Looking at things on ground zero, de facto the government may have already allowed 100% FDI in MBR – both online and offline. But, it is ‘unfair’ and lacks ‘transparency’. This gives an edge only to a select few who may be in a better position to manage the bureaucrats and prepared to take the risk of flouting norms which anyway are facile and not amenable to easy compliance.
So, why not open the front gate? The government should permit 100% FDI in MBR – both online and offline, without any riders. With a uniform policy in place, several MNCs [not just Walmart or Amazon.in] will come in droves and also invest substantially in handling, storage, transportation and quality assurance – indeed all spheres of logistics and infrastructure – as they see opportunities for growth.
Will Modi bite the bullet?