Retail comes from the French word “tailer,” which means to ‘cut-off’, ‘shred’ and ‘divide’. Who would have imagined this 15th century definition would have significance even today, when the Indian Government announced its decision to overhaul the retail sector and finally permit Foreign Direct Investment (FDI) in Multi-Brand Retail (MBR). But those meanings continue to have relevance. This recent policy has further ‘divided’ those that support FDI in retail and those opposed to it. It has resulted in the UPA coalition finally ‘cutting-off’ from its troublesome ally, the Trinamool Congress, who opposes it. And, interestingly, in one shot, the Government has ‘shred-off’ the tag of ‘policy paralysis.’ No wonder politics is described as the art of the possible. By that token, coalition politics is perhaps all about “risk” and “courage,” the words the PM used to describe this recent policy announcement.
To be clear – FDI in MBR may not be the panacea of all ills currently confronting the Indian economy. But it will provide the much needed fillip to Indian businesses and demonstrates the Government’s commitment to reforms. As an Under Secretary from the United States said, the Indian Government’s decision is clearly a “watershed” moment which will revive “new optimism” towards India’s growth story. No we don’t need a foreign government official to endorse our policy decisions. But it’s encouraging to hear an official of a country that makes the largest investments in India speak favourably about our investment climate. And just because an official from the country that is home to the world’s largest retailer makes a positive statement does not mean that the policy is made for the benefit of any country other than our own. Permitting FDI in MBR will help farmers, consumers, retailers and everyone else in the value chain – in India! One has argued on many occasions in this newspaper that the opposition to FDI in retail is more ideological than practical. It appears that “fear and false information” is indeed being spread about the ills of FDI in retail. This compels one to think– is the opposition now just turning adamant and egotistical? Is politics in our country greater than the need and desire of economic prosperity? Are national interests somehow becoming secondary to political one-upmanship, even when it’s at the cost of those whose interests the politicians are supposed to represent and defend?
Unfortunately, given the political contentiousness surrounding this much awaited policy announcement, the response of foreign retailers has been tepid. While one respects the political compulsions of leaving the implementation to the discretion of States, the fact that the BJP has openly voiced that upon assuming power it will overturn even the existing investments has resulted in the investors proceeding with trepidation. This is no veiled threat. Let’s recall the Himalayan Ski-Resort planned in the State of Himachal Pradesh. When the project was accorded permission, the State was ruled by Congress. The BJP was opposed to it and upon coming to power is reported to have cancelled it, jeopardising the US$500 million project, which at present is in dispute before the local Courts. Economist Eswar Prasad is correct in saying that “policy reversals and domestic power plays that turn foreign-financed projects into political footballs are likely to further dampen confidence among foreign investors.” Overturns also have the potential of triggering bilateral investment agreements and one only hopes that no steps are taken which are in any way regressive.
Some of the other conditions surrounding the policy are also burdensome. The policy requires the minimum FDI to be “brought in”, meaning fresh investments and does not allow for conversion of existing investments, has to be US$100 million. It also clearly requires “at-least 50% of total FDI brought in shall be invested in back-end infrastructure within three years of the first tranche of FDI.” These investment compulsions lead one to think whether FDI is acquiring a new meaning of Fulfilling Demands in India! But asides from the pure commercial arguments, to expect that all the investment in back-end infrastructure should happen within three years of the first tranche is impractical and oppressive. Granted, the policy will shortly get ironed out, but similar stipulations, when FDI in real estate was permitted, posed challenges and eventually had to be clarified.
Similarly, while the stipulated 30% domestic sourcing is intended to benefit Indian industry, the definition of “small industries” being those which have a total investment in plant and machinery not exceeding US$1 million can in fact be an impediment to nurturing quality domestic enterprise. Also, while providing for an average procurement of products purchased over five years is well intentioned, the stipulation that it will be measured from the first tranche of the fresh investment is onerous.
Despite the above, India continues to be an attractive investment opportunity for foreign retailers. With disposable income increasing at an average of 8.5% per annum, urban population expected to touch 40% by 2020, increased consumption levels, growing awareness amongst consumers the business prospects are unparalleled. The UPA’s vow to not let this opportunity pass could earn-back some of its lost political authority and could just be that strong plank that works in its favour in the next elections. And, if, in the bargain, we are able to raise India’s rank from 132 out of 183 countries on the World Bank’s list of ease of foreign companies doing business in India, then it’s an added advantage.
Satvik Varma is an advocate & corporate counsel in New Delhi.
First Published in The Economic Times.