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Economy Feb 1, 2013

Retail FDI is a non-starter yet. Should govt abandon it?

By Rajesh Pandathil

There is more evidence that India's foreign direct investment policy for the retail sector is on slippery-slope.

According to a report in the Economic Times, four months into allowing FDI in the sector the government has not yet got a single proposal from any of the global corporations.

This is in stark contrast to the earlier perception that the multinational retail chains are just waiting for the government to formulate the policy to enter the country.

Apparently, the government authorities are desperate to show that the policy, which had put the United Progressive Alliance in a life-and-death situation when it was introduced, is actually paying off for the country and itself, the ET report said.

According to the report, the government has started going after various companies asking the details of their plans.

One can't blame the government for the desperation, for the country's current account deficit is in difficult situation. And the quick-fix solutions, like curbs on gold imports, are not working.

One can't blame the companies either, for the delay in finalising their plans, given the kinds of restrictions they are facing.

As per the policy, the minimum investment foreign retailers need to make is $100 million. Of this, $50 million has to be in the back-end infrastructure over three years. Further, 30 percent of the value of the products being sold has to be sourced from local small-scale industries.

How can they afford to comply with these rules, asks Kishore Biyani, CEO of the Future group, in the ET report. According to him, "fashion or electronics does not need that kind of investment in the backend".

Above all is the power the state governments enjoy to not allow foreign multi-brand retailers to set up shop.

According to a Times of India report, Wal-Mart and the US government have expressed their concerns over this policy. As of now, only 10 states and Union Territories are in favour of the policy.

Wal-Mart is worried that policy reversals at the state-level are likely once a new political party comes to power there. It has also asked the government whether investment in real estate will be calculated as investment in back-end.

The concerns expressed by the retail giant are valid. Only two days ago had Rajnath Singh, national president of the main opposition BJP, reiterated that the party would reverse the retail FDI policy if voted to power in the general elections in 2014.

Singh's statement is just adding to the criticisms the policy has attracted from various quarters.

Wal-Mart is worried that policy reversals at the state-level are likely once a new political party comes to power there.

Wal-Mart is worried that policy reversals at the state-level are likely once a new political party comes to power there.

Nobel laureate American economist Joseph Stiglitz recently warned the policy would promote instability in India due to exploitative and corrupt practices adopted by multi-national companies to monopolise the retail markets in any country.

He also pointed out that Wal-Mart bribed officials at various levels in Mexico to monopolise the retail market there.

"May be, you want to learn bribery. But I don't understand what India is trying to get out by allowing FDI in multi-band retail," a PTI report quoted him as saying.

His comments assumes significance as Wal-Mart is already being probed in India after the company disclosed in the US that it had spent $25 million over four years to lobby American lawmakers to help gain access to overseas markets, including India.

The disclosure had kicked up a storm in India and the government recently constituted a single member panel to investigate the matter.

Prior to this, there were allegations that Wal-Mart's Rs 456 crore investment in Cedar Support Services, which owned Bharti Retail, in March 2010 was illegal.

However, both Bharti and Wal-Mart have denied any wrong doing.

The Enforcement Directorate is probing the issue.

Adding to the worries is a recent rap the government received from the Supreme Court over the policy.

Is FDI in retail a "political gimmick", the apex court had asked the government and sought to know how it intends to safeguard the interest of small traders after opening up the retail sector.

"Has the policy brought some investment in the country or is it just a political gimmick. Has the policy brought some fruits?" the bench hearing a public interest litigation (PIL) questioning the policy had asked on 22 January.

It also asked what were the checks "to ensure that free trade is not affected, particularly the interest of small traders".

The court has adjourned the matter for five weeks.

On the whole, the policy has failed to ring in anything positive for the government or the country. Moreover, there are chances that the government may get into trouble later on.

For instance, if there is a policy reversal after the 2014 elections, for which chances are not remote, the matter is likely to assume legal proportions, if the companies approach the World Trade Organisation.

Moreover, the government's desperation for foreign investment can turn out to be a breeding ground of kick-backs and other such allegations.

With the critics of the retail FDI policy gaining in strength, the lack of consensus on the issue is becoming clearer.

In this context, isn't it better for the government to abandon the policy altogether, at least until the economy and people of the country are mature enough to accommodate it?

by Rajesh Pandathil

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