In budget for 2016-17, the finance minister had announced 100% foreign direct investment [FDI] in food retail subject to retailer selling only food procured from farmers in India and processed locally. After wait for more than a year, the government has now approved an application of Amazon.in for 100% FDI in food retail chain – both on-line sales [e-commerce] and offline [brick-and-mortar].
While, this may signal big boost to reform and liberalization in regard to FDI in retail, the cobweb of policy maze seems to be getting murkier. At the outset, a few words on how the policy dispensation has unfolded over the last decade or so.
For the purpose of FDI, the government has classified retail in two broad categories viz. single-brand retail [SBR] and multi-brand retail [MBR]. Under each, the extant policy dispensation has undergone many twists and turns.
In 2006, the then UPA government even while permitting 100% FDI via automatic route in whole-sale/cash and carry business, allowed up to 51% FDI in SBR subject to approval by now defunct Foreign Investment Promotion Board [FIPB]. FDI in MBR was then prohibited.
In 2012, the FDI limit in SBR was increased to 100% of which investment up to 51% was on ‘automatic’ route whereas for increasing it to 100%, the permission of FIPB was needed. For foreign shareholders wanting to invest beyond 51%, the government imposed an additional condition that the retailer should source 30% of its merchandise locally from small and cottage industries.
In 2015, NDA government permitted 100% FDI in online sales for SBR, even while relaxing time-period for sourcing norms. Last year [2016], the guidelines were amended to exempt foreign retailer from this condition if investment is made in ‘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.
As regards MBR/brick-and-mortar, in 2012, 51% FDI was 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. At least half of the first US$ 100 million investment had to be in the back-end support infrastructure.
In MBR/online, government allowed 100% FDI in ‘market-place’ – an IT platform which provides support services viz. warehousing, logistics, order fulfillment, payment collection etc to sellers and buyers. This is subject to no more than 25% sale by a single vendor and no advertisement or discounts by e-commerce company. In ‘inventory’ based model, where the company also owns 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. Other than IKEA which got approval [2013] with 30% local sourcing, all potential entrants including 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/brick-and-mortar, during last 5 years since, the policy was approved, except Tesco which has a joint venture with Tata’s Trent, there has not been any FDI. In fact, there were exits. Bharti-Walmart venture split in 2013 and Carrefour exited next year. 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 backdoor. They do so by camouflaging their activities under market-place model [through clever documentation engineering, all that they need show is that stock is held by someone else].
The 100% FDI in food retailing announced last year may have enthused Amazon for now but the riders will continue to haunt it. The food processing minister wants this to be tagged to investment in agriculture infrastructure. Add-ons [e.g. grocery items] are a matter of intense negotiations; it will give lot of discretion to bureaucrats.
In a bid to address anomalies, the government is now keen to allow 100% FDI in MBR – both offline and online. But, this will be subject to foreign retailers selling goods made in India only. This won’t make the policy environment any better. First, it will come with riders on investment limits, state approval etc.
Second, the requirement of selling only locally made items 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 will also be discriminatory vis-à-vis an Indian owned outlet which can also sell imported product.
Third, 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.
Modi’s intent to allow 100% FDI in retail is laudable, but to do it only for locally made 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 distinction [SBR or MBR; 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 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.
It is high time, the government should shed its incremental approach and go for ‘holistic’ reform in this critical sector.