In the context of the raging debate over relaxing local sourcing norms for 100% foreign direct investment [FDI] in single-brand retail, finance minister, Arun Jaitely [he is the controlling authority for Foreign Investment Promotion Board (FIPB) which approves proposals for FDI] observed that India cannot be turned in to a ground for proliferation of trading activities.
The strident observation came in response to intense lobbying by commerce minister, Nirmala Sitharaman for dropping of 30% local sourcing requirement for setting up of retail shop by Apple for selling its hand-sets [i-phones, i-pads etc] directly to customers. She was relying on recent amendment in policy guidelines which provided for such exemption in case of high-tech items. The exemption was justified on the ground that what Apple would need viz components/accessories etc which are not available in India and hence, it has no other option but to import. Yet, if local sourcing is insisted, the very objective of allowing FDI will be defeated.
The government appreciated the logic and brought about the amendment. But, while doing so, ingenious bureaucrats left a loophole. They did not define what constitutes high-tech items and left it to department of industrial policy and promotion [DIPP] to determine – on a case-to-case basis – as to who should get exemption.
So, even while DIPP was pushing a case for exemption to Apple, other players [Samsung, Lenovo/Motorola etc] raised the bogey of non-discriminatory treatment. Even so, case-specific approval is out of sync with Modi’s thrust on policy driven governance. Accordingly, finance ministry debunked this approach and asked the department to come with a comprehensive definition of high-tech items.
Though sounding good, this is a complicated terrain. There are hundreds of sectors and each has its own nuances. What constitutes high-tech for one sector may not be relevant for another. Even within a sector, the task is not that simple. As such, it may not be possible to capture all scenario under one set of guidelines. Moreover, the guidelines can at best serve as a guidepost and there won’t be any escape from bureaucrats taking a call on individual cases.
This brings us to a fundamental question. Why should we have local sourcing requirement at all? The government may argue that without this, domestic industries will be crippled. This is a self-defeating argument. How can it have the cake and eat it too? It wants MNCs to come in so that we benefit from their resources and technology; and yet tell them how much they will buy and from where? Such decisions should be left to market forces.
Even so, the fear of adverse impact on local industries is un-founded. They have an inherent location advantage vis-à-vis import. If, they can offer competitive price and meet requisite specification, why would a foreign retailer not buy it from them instead of going for import? India Electronics and Semiconductor Association [IESA] says its members can fulfill component wish list of Apple for making i-phones if it can get purchase commitment from latter.
There is no reason to doubt the capability of IESA members. On that strength alone, they should be able to get order. However, for them to seek a direction/order from the government [read mandating local sourcing requirement] is not the right way to go. This will not only run foul of market forces but also tantamount to resurrecting the license raj through the back door.
There can be no two opinions on over-arching philosophy of “Make in India” adumbrated by prime minister. For that, the government should create an environment whereby, our industries are able to supply to MNCs at competitive price. This would require giving them good infrastructure especially power and roads besides making credit available at low interest rates. Modi is already focusing on these areas and we should expect good outcomes.
The local sourcing requirement is an anaethama to reforms. The policy needs to be modified to allow for 100% FDI in single brand retail without any riders. Already, this is permitted for business-to-business [B2B] or sale to wholesalers without any conditions. It is anomalous that for selling to wholesalers, seller is not expected to comply with local sourcing whereas for direct selling to consumer [B2C], this is required. This anomaly must go.
In the budget for 2016-17, Arun Jaitely announced 100% FDI in food retail. The guidelines are currently being debated at the inter-ministerial level. The permission here too will be subject to a host of conditions such as selling locally processed/manufactured food [100%], using agricultural produce sourced only from Indian farmers and 25% of investment must go for creation of agri-infrastructure viz., irrigation, farm machinery/implements etc.
For 51% FDI in multi-brand retail [MBR] already approved by erstwhile UPA – dispensation in 2012 and continued by Modi – government, there are 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.
Even in e-commerce, where the government recently 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. FDI in inventory based model of e-commerce [where the company also owns the inventory of goods and services] is prohibited.
A complex web of conditions appended to FDI proposals under various categories 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.