Policy mess getting worse

FDI IN RETAIL : While the Centre wants to welcome FDI, it does not want to displease its core constituency of traders, opposed to FDI per se.

The government has set up a committee under the Niti Aayog CEO to look into all issues including the Foreign Direct Investment (FDI) norms pertaining to the fast growing e-commerce industry.

Since much of e-commerce is in retail, and trade via this route is a portion of overall retail wherein also contentious issues relating to FDI are involved, it would be apt if the committee examines investment norms in a holistic framework covering both online and offline.

At present, the retail sector in India is hamstrung by a policy maze which gives too many confusing signals and leaves scope for varied interpretations. Even worse, it gives too much of discretion to bureaucrats in deciding as to who would be allowed and on what terms. In essence, we have a licence raj through the back door (though, de jure, it had ended a quarter century ago with initiation of economic reforms in 1991).

For the purpose of FDI, the government has divided retail in to several classes which is completely out of sync with international practice (where retail is treated as a single homogenous sector without any distinction). In India, we have single-brand retail (SBR) and multi-brand retail (MBR). Within SBR, there are three sub-categories: wholesale cash and carry, 100% SBR stores and online stores. 

Within MBR, there is the `physical format’ or what is euphorically called ‘mom-and-pop’ store. Then, we have ‘online’ which, as per the recently notified guidelines by the Department of Industry, Policy and Promotion (DIPP), has two sub-categories: ‘market-place’ model and ‘inventory’ based model.  The policy dispensation is different for each of the sub-categories. Thus, in wholesale cash and carry or business-to-business (B2B), 100% FDI is permitted without any conditions. In other words, an MNC can set up a ‘fully-owned’ shop in India for making supplies to wholesalers (institutions making bulk purchases are also covered). 

As regards SBR, 100% FDI is permitted subject to the company sourcing 30% of its requirements from local vendors. Recently, the guidelines were amended to relax this condition if investment is made in a high-tech area (DIPP has been asked to evolve a suitable criteria in this regard). An MNC already operating a fully owned SBR store can also latch on to ‘online’ sales.  

In MBR, 51% FDI is allowed but with a plethora of riders including 30% local sourcing, minimum investment of $100 million and prior approval of the state where retail shop is to be set up. This effectively prohibits foreign investment. During the last four years – since the policy was approved in 2012 – except Tesco which has a joint venture with Tata’s Trent, there has not been any FDI in this segment.

Meanwhile, in the Budget for 2016-17, Finance Minister Arun Jaitley anno-unced 100% FDI in food retail. Even as guidelines are still at formulation stage, going by a statement of the food processing minister, investment will be subject to a host of conditions such as selling only those products which are locally processed and using agricultural produce sourced only from the Indian farmers. Besides, 25% of investment should be in agri-infrastructure such as irrigation, farm machinery/implements etc.

In the e-commerce (or online sales) segment of MBR, recently, the government notified guidelines to allow 100% FDI in market-place model (an IT platform where sellers and buyers conduct transactions). The permission is subject to conditions such as: not more than 25% sale by a single vendor, no advertisements or discounts to be given etc. However, in ‘inventory’ based model of e-commerce (where the company also owns the inventory of goods and services), FDI is prohibited.

There are several contradictions and inconsistencies in the extant policy environment. It is ironical that 100% FDI is allowed in wholesale cash and carry but when it comes to retail, investment is restricted to 51% in MBR with onerous riders. Even in SBR where 100% FDI is permitted, the same is subject to local sourcing requirements. To let an MNC sell to wholesalers without any encumbrances and put conditions when it comes to their ‘direct’ retailing is anomalous. 

The recent decision to dispense with local sourcing requirements for FDI in high-tech areas of SBR has opened a Pandora’s box. It has led to dozens of claimants seeking exemption. This will only perpetuate the discretionary powers of bureaucrats making the system vulnerable to charges of unfair treatment and discrimination by those who are denied this exemption.

Market-place model

Within the MBR sector, even as FDI in physical format is effectively barred (courtesy, onerous conditions), it is permitted through backdoor via online sale. This is camouflaged under the so called market-place model where the e-commerce company does almost everything that a seller needs to do for executing a sale transaction and yet gets away with 100% FDI. Even such backdoor entrants are not allowed to live in peace due to a plethora of riders.

In yet another glaring instance of inconsistency, the government has announced 100% FDI in retailing of food even while continuing with only 51% FDI in MBR that too with riders. Food constitutes nearly half of the retail business in India. It defies logic to keep rest of retail trade outside even while permitting 100% FDI in food. 

In short, the current policy on FDI in retail is in complete mess. This is the outcome of Team Narendra Modi’s attempt to wear two hats concurrently. While, as reformist, it wants to welcome FDI and at the same time, it does not want to displease its core constituency of traders who are opposed to FDI per se. This will lead us no where. It will neither enthuse MNCs to come in nor promote “Make-in-India”. 

In line with its reform credentials, the government should wear only one hat. It should allow 100% FDI in retail without making any artificial distinctions (single brand or multi-brand; online or offline) and without any pre-conditions.

(The writer is a New Delhi-based policy analyst)