Discussion Paper on Foreign Direct Investment in multi-brand retail trading

The Department of Industrial Policy and Promotion (DIPP) has recently commenced issuing discussion papers on some important subjects on Foreign Direct Investment (FDI), inviting public comments. In this regard, a discussion paper on FDI in the defence sector was released in May 2010. The DIPP has now released (on July 6, 2010) a discussion paper on FDI in multi-brand retail trading. This special edition briefly discusses the present policy on FDI in trading and thereafter summarizes the aforesaid discussion paper on multi-brand retail trading. Present FDI policy on trading The present policy allows 100 percent FDI in cash and carry wholesale trading under the automatic route, subject to certain conditions. ‘Cash and carry wholesale trading’ means sale to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. With regard to retail trading, FDI up to 51 percent is allowed with prior approval of the Government in single brand retail trading of products, subject to the following conditions: ·
Products to be sold should be of a ‘Single Brand’ only. ·
Products should be sold under the same brand internationally ie products should be sold under the same brand in one or more countries other than India. ·
‘Single Brand’ product-retailing would cover only products which are branded during manufacturing. The extant policy prohibits FDI in multi-brand retail trading. Discussion paper on multi-brand retail trading Present scenario The Discussion Paper summarizes the present policy on retail trading and provides statistics with respect to retail trading in India. It notes the following major concerns which have been expressed with regard to opening of the retail sector for FDI: ·
It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector, which presently is the second largest employer after agriculture.
The Indian retail sector, particularly organized retail, is still underdeveloped and in a nascent stage and therefore it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors. Recommendations of various studies The Discussion Paper discusses the recommendations of various reports / studies in relation to FDI in retail sector. Most of these reports (reports prepared by FICCI and ICICI Property Services, Centre for Policy Alternatives, Mid Term Appraisal of Tenth Plan, ICRIER and Economic Survey 2008-09) recommend opening of FDI in retail trading on a gradual basis. As per these studies, opening of FDI in retail trading would lead to several benefits such as supply chain improvement, investment in technology, manpower and skill development and greater GDP and employment generation. The Parliamentary Standing Committee on Commerce, in its 90th Report on ‘Foreign and Domestic Investment in Retail Sector’ has identified a number of issues related to FDI in the retail sector, including labour displacement, disintegration of established supply chains by establishment of monopolies of global retail chains, etc. Accordingly, the Committee made various recommendations for regulation and development of the retail sector. FDI policy in retail trading in other comparable countries The Discussion Paper mentions that FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation, while Malaysia has equity caps in this regard. The Discussion Paper thereafter discusses the experiences of countries that allow FDI in the retail sector. In most of these countries, the Discussion Paper notes that opening of the FDI has led to the development of a large organized retail industry and entry of major players in the market. Rationale for FDI in retail trading The Discussion Paper rationalizes the entry of FDI in retail sector on a calibrated basis, citing various benefits for the country, such as: ·
Improvement in the supply chain infrastructure by bringing in technical know-how and capital ·
Improvement in farmer income through removal of structural inefficiencies ·
Benefits to customers in the form of better quality of products and lower prices Issues for resolution
The Discussion Paper finally lists out certain issues for resolution in respect of which comments are invited from the public. These issues, in brief, are as follows: ·
Whether FDI should be allowed and, if yes, to what extent, in multi-brand retail trading? · Whether it should be mandated that a percentage of FDI coming in should be spent towards building up of back end infrastructure, logistics or agro processing? ·
Should a minimum threshold limit for investment in backend infrastructure logistics be fixed? If so, what should this financial threshold be? ·
Should FDI be permitted with conditions for employment generation in rural areas, for example, a condition that at least 50 percent of the jobs in the retail outlets should be reserved for the rural youth? ·
Similarly, to develop the Small and Medium Enterprises (SME) sector through local sourcing, should it be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India? ·
How can the small retailers be integrated into the upgraded value chain? For example, should it be stipulated that a minimum percentage of sales of the FDI funded retailers should be made to other retailers through special wholesale windows? ·
Should FDI in retail trading be initially allowed only in cities with population of more than 1 million and nearby areas? ·
Will any of the conditionalities mentioned above be inconsistent with India’s commitments under the WTO agreement? If not, can such conditionalities be extended to all retail chains in India above a certain size?
Will such extended conditionalities be consistent with Article 301 of the Indian Constitution? ·
What additional steps should be taken to protect small retailers (for example, an exclusive legal and regulatory framework or a Shopping Mall Regulation Act)? Does this require intervention at national level or should this be left to the States? ·
Whether the Government should reserve the right of first procurement for the public distribution system (PDS) for a part of the season or put in place a mechanism to collect a certain amount of levy from private traders in case the level of buffer stock falls below a certain level?
Whether there should be a centralised agency, to be nominated by the State Governments, to grant permissions and monitor compliance with the above stipulations?
Whether such agency should also be empowered to monitor compliance of the present cash and carry outlets? ·
In case of non-compliance, apart from the penalty of cancellation of approvals as well as denial of future permissions for such activities, whether additional civil and / or criminal penalties should be imposed?

ARTICLE BY : CA MOHAN CHAND