In the Union Budget for 2016-17, the Finance Minister had announced 100% foreign direct investment (FDI) in retail food. This was subject to the retailer selling only food procured from farmers in India and processed locally. However, guidelines in this regard are yet to be notified. Meanwhile, the Government is reportedly 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 flawed.
At the outset, a few words on the existing policy dispensation on the FDI in retail. For this purpose, retail is classified in two broad categories, viz, single-brand retail (SBR) and multi-brand retail (MBR).
In the SBR, 100% FDI is permitted (in both offline and 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 “cutting-edge technology”. However, full exemption will be available for the first three years only and thereafter, it will be partial for five years on a sliding scale.
In the MBR offline and physical format (also known as “mom-and-pop” store in common parlance), 51% FDI is allowed subject to 30% local sourcing, a minimum investment of USD 100 million and prior approval of the State where the store is to be set up.
In the MBR/online segment, 100% FDI is allowed in “market-place”- an IT platform which acts as facilitator for sellers and buyers and provides support services, viz, warehousing, logistics, order fulfilment and payment collection. This is subject to no more than 25% sale by a single vendor and no advertisement or discount by an e-commerce company. In an inventory-based model, where the company also owns an inventory of goods and services, FDI is prohibited.
The guidelines are not conducive for attracting foreign investment. In the SBR, despite 100% FDI, foreign investors are far from enthused. Other than the IKEA which got approval (in 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 three, four, five, six years …. is left to the discretion of bureaucrats).
In the MBR/offline, during the last four years since policy was approved (in 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”.
POLICY MAZE
This policy maze has also led to a scenario whereby online players owning an 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 the market place model (through clever documentation engineering, all that they need to show is that stock is held by someone else).
In food, in the absence of detailed guidelines, a mere announcement of 100% FDI won’t lead to any investment proposal. Even so, the Food Processing Industries Minister’s frequent refrain of tagging this to investment in agricultural 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 instil 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 a 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 an imported product.
Third, the proposal is being touted to be in sync with the much-trumpeted Make in India scheme. It presupposes that a foreign company will set up a 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.
CONTRARY TO PRINCIPLE OF FREEDOM
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, it 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 and investment limits) and dispensing with all classifications and sub-classifications.
It should allow 100% FDI in retail without making any 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 the supply and distribution chain, reduce the cost to consumers, expand markets and boost tax collections.
A collateral gain will accrue by way of reducing the number of cases pending in courts (they waste the precious time of the judiciary, the bureaucracy and industry) all triggered by differential policy guidelines applicable to different segments of retail under extant dispensation.
Hope, Team Modi is listening!
(The author is a policy analyst based in Delhi.)
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