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Current Affairs, FDI

THE WALLS AGAINST RETAIL MARTS

When Mark Twain coined the phrase, “time cools, time clarifies; no mood can be maintained quite unaltered through the course of hours”, he probably overlooked the entire political class and their obstinacy to hold firm on decisions, especially in their opposition to matters.

Last week, most foreign investors, policy pundits and economists were lauding the Congress party’s decision to allow 51% FDI in multi-brand and 100% in single-brand retail. Sadly, it was all short-lived.

Owing to the unrelenting stand of its allies and the impasse it had reached with its political opponents, the government has been compelled to put on hold FDI in retail. If the objective of this policy initiative was to restore people’s confidence in the government’s commitment to economic reforms and earn back its political authority, the end result is far removed from the desired goal.

FDI investments in retail were subject to stringent stipulations including permission only to enter cities that have a population of above one million, a minimum investment of $100 million, of which 50% is to be used on back-end infrastructure and the requirement that 30% of the goods must be sourced from small-scale industry.

Voices of dissent, both within the UPA and from the Opposition, were heard right after the announcement. Confusion also arose on what constituted back-end infrastructure and whether sourcing from small-scale industry needed to be done domestically or could be from anywhere. And, over the next few days, there was turmoil in Parliament.

Compelled to take corrective action, the government tried to run a campaign on the benefits of FDI in retail: new manufacturing activities; new jobs, lower prices of products; benefits for the farmers et al. But none of this cut any ice with the mass opposition to FDI in retail. By this time, it was reported that perhaps even the government and the Congress party were not on the same page. Eventually, the government was forced to announce that the decision has been put on hold till a consensus on the matter is reached.

A threadbare analysis of the sequence of events is important to examine whether coalition politics can alone be blamed for the government’s recent predicament. If so, what is holding it back from throwing in the towel rather than being held hostage to the dictates of its allies? Was it arrogance or mismanagement that prevented the Congress from talking to its allies before taking a decision? Also, is politics the only obstacle in the government’s roadmap to restart the economic reform process or are the voices of dissent a manifestation of the trust, governance and leadership deficit towards the ruling government? Is this a setback that the government will be able to recover from or has its image been tarnished beyond repair?

To be fair, the government’s decision of permitting FDI in retail would have helped check inflation, resolved the slow growth rate and would have brought an immediate correction in prices. If allowed to run its natural course, it would have been a win-win for all. The elimination of middlemen would have led to greater transparency in pricing and helped reduce the difference that currently exists between the farm-to-fork prices. The setting up of supply chains would have helped reduce food wastage (estimated at 30-40% of total production) and improve food safety and hygiene. Consumers would have benefited from the increased efficiency and there is almost no empirical data to support that kirana shops would have got displaced.

But we can’t blame everything on democratic functioning requiring one to sometimes rework policy initiatives. If we keep taking cover under our democracy, the time is not far when foreign investors will begin to question the Indian policymakers’ ability to introduce new or stick by regulatory initiatives that may not always be popular when first introduced. As it is,Indiastands at 132nd place in the World Bank’s 2012 report comparing the regulation for domestic firms in 183 economies.

If government flip-flop continues, then despite the $450-billion lure of retail, no foreign investor would want to invest. If the call of the hour is to build political consensus and if that is what can see India through the current slowdown and economic gloom, then it is incumbent on the ruling collation to embrace the same. But parliamentary opponents must demonstrate equal statesmanship by rising above political agendas to serve national interests. Although the all-party meet called to discuss the matter before Parliament reconvened, didn’t end up in a logjam between a ‘rollback’ and ‘hold-off’. But by ‘suspending’ its decision, the government may have indirectly also left its credibility somewhat dangling!

Satvik Varma is an advocate and corporate counsel and founder of Independent Law Chambers based in New Delhi. He is a graduate of Harvard Law School and is admitted to practice in New Delhi and New York. He can be contacted on svarma@indlawchambers.com

FIRST PUBLISHED IN THE ECONOMIC TIMES ON 08TH DECEMBER, 2011.

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