Is Govt Softening Its Stand On Foreign Investment In Retail

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 New Delhi: The National Democratic Alliance (NDA) government on 16 July cleared a long-pending proposal of the United Progressive Alliance (UPA) government, giving Indian companies greater leeway to choose the kind of foreign investment they wish to bring in within the overall sectoral ceiling: foreign direct investment (FDI), widely considered long-term capital; or foreign portfolio investment (FPI) or short-term capital.

 
 
Companies can raise FPI up to 49% without prior government approval or compliance with any sectoral conditions. The second proposition is especially good news for companies as it is considered a major ease-of-doing-business initiative by the government, removing another layer of red tape. The move is expected to benefit listed Indian retail companies, which had started demanding “level playing field” with e-commerce companies in having access to foreign money, in a big way.
 
 
While the UPA government allowed 51% FDI in multi-brand retail, it deferred a decision to make the foreign investment cap a composite one, through which listed retail companies could raise portfolio investment up to 51%. Kishore Biyani’s Future Retail Ltd repeatedly approached the UPA government for such easing of the norms, but with no success.
 
 
To be sure, under the current regulations, Indian companies can raise their FPI holding beyond 24% to reach the permitted sectoral cap, by seeking the approval of its board or through a special resolution approved by shareholders. Earlier, lack of clarity about the foreign investment policy on multi-brand retail had deterred companies from raising FPI holding beyond 24%.
 
 
Though the NDA government’s revulsion on FDI in multi-brand retail is well-known, it may have found a way out to provide some “level playing field” to offline retail companies by allowing them to access up to 49% of FPI through the equity market without having to approach the Foreign Investment Promotion Board for any approval. Also, even with 49% foreign capital, such companies will not have to be guided by the strict conditions attached with FDI in multi-brand retail, such as 30% compulsory sourcing from Indian small and medium enterprises. These conditions are considered a major dampener by foreign retailers.
 
 
This is not the only change the government has brought about in its retail sector policy. Internationally, too, India has started sending signals that it is ready to make e-commerce part of trade agreements.
 
 
At present, the government allows 100% FDI in wholesale e-commerce trading but none in retail e-commerce trading. However, it has often alleged that in the name of a market place model, wholesale e-commerce companies are flouting existing norms.
 
 
So far, the government was of the view that since its domestic e-commerce policy is not clear, it will be difficult to include it in international treaties.
 
 
At present, the government is reluctant to allow FDI in retail e-commerce, fearing it will lead to backdoor entry of foreign offline supermarket chains.
 
 
In the just-concluded inter-session meeting of trade ministers belonging to the 16-member Regional Comprehensive Economic Partnership grouping at Kuala Lumpur, India has agreed to the formation of a working group on e-commerce, after initial strong resistance to the move by Japan.
 
 
Similarly, reversing its stand against engagement in e-commerce at the grouping of the five emerging economies, BRICS, India agreed to the Framework for BRICS e-commerce Cooperation at BRICS summit in Ufa, Russia, earlier this month.
 
 
“We applaud the progress in the implementation of BRICS Trade and Investment Cooperation Framework. We welcome the Framework for BRICS Ecommerce Cooperation as an instrument to promote current and future initiatives with an aim to build a closer economic partnership in this sphere. We instruct our ministers to continue to explore ways and means in strengthening our cooperation on e-commerce,” the joint statement of the Ufa declaration read.
 
 
Explaining the logic behind the role reversal by India, a government official said if India doesn’t get into negotiations on e-commerce at international forums at this stage, it will end up being a loser. “Right now we don’t understand how the growth will be. If globally there is so much interest, then you better be there to control the architecture of it. If you don’t join now, then you will be left out. You have to be in control and define the rules of the game,” he added. However, the official clarified that at this stage, India has only agreed for cooperation and information exchange and will not accept any liberalization commitments in e-commerce.
 
 
Parallely, the government is engaged with stakeholder consultations to resolve issues involved with online and offline retail. In a recent consultation with state governments, Bharatiya Janata Party (BJP)-ruled states like Rajasthan, Madhya Pradesh and Haryana appealed to the government to follow a pragmatic approach while deciding on foreign investment in retail, rather than a dogmatic approach.
 
 
So, is the Narendra Modi government slowly moving towards a compromise between its party’s avowed position of not allowing FDI in multi-brand retail sector and changing ground realities?
 
 
One possible compromise, some analysts believe, could be allowing a minority stake, possibly 49% FDI, instead of a majority stake of 51% FDI to foreign supermarkets in the Indian retail space. “The government could politically sell such a proposal by saying that it is not allowing foreign supermarkets to set shop in India, rather allowing Indian retailers to have access to foreign capital and technology,” a partner with a law firm said, requesting anonymity.
 
 
If one is to believe economist and Columbia University professor Jagdish Bhagwati, who is considered ideologically close to the NDA government and is a well-known supporter of Modi, the government will open up the retail sector for FDI during its five-year tenure.
 
 
Delivering the Madhav Rao Scindia Memorial Lecture in January this year, Bhagwati said the problem with FDI in retail was that BJP had its traditional support base among small shopkeepers. “Now that Modi has got a wider constituency, he may be able to move. Whatever little conversation I had with him when he was chief minister of Gujarat, I did not find him having any anti-retail liberalization sentiment,” he added.
 
 
“I can give a bottle of Indian wine, not foreign wine, if I lose,” Bhagwati said on his bet that the retail sector will be opened up.
 

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