Clear the air on FDI in retail

June 07, 2016 12:48 am | Updated November 17, 2021 02:18 am IST

Given the Centre’s focus on attracting investment and improving India’s ‘Ease of Doing Business’ ranking, it is time it took an unambiguous stand on >foreign direct investment (FDI) in retailing . While it is true that the government has eased some rules relating to investment in single-brand retail operations, the norm on ‘sourcing’ locally remains a significant grey area, as reflected in the discussions around Apple’s plans for India. In November, the Centre eased the rules permitting 100 per cent FDI in ‘Single Brand Product Retail Trading’ subject to the sourcing caveat — the precondition being that companies with more than 51 per cent foreign ownership must source 30 per cent of the value of goods in India, preferably from medium, small or micro enterprises. In isolation, the requirement of a certain proportion of domestic content in the products has a socio-economic relevance, given its potential to create jobs and protect livelihoods. But the sourcing norm has inhibited FDI inflow; worse, it could fall foul of the WTO’s National Treatment norms. The Centre therefore amended this condition allowing for an exemption to entities selling “products having ‘state-of-the-art’ and ‘cutting-edge’ technology”, and even more ambiguously, in cases “where local sourcing is not possible”. Predictably Apple has sought waivers citing the exemption clause. Its case seems to have found support with >Commerce Minister Nirmala Sitharaman , who said her Ministry was in talks with the Finance Ministry on allowing Apple to open company-owned stores in India and to explore whether there was a need for separate guidelines for sourcing waivers.

Rather than get into a potentially convoluted debate about when exemptions should be given, the best course, given the circumstances, is to drop the sourcing condition altogether. It is counterproductive and open to charges of arbitrariness. Allowing Ministry officials the discretion to decide on what constitutes ‘cutting-edge’ technology or whether local sourcing is possible or not opens the door for less-than-transparent outcomes and the possibility of litigation. A competitor that has invested in local manufacturing capacity would justifiably feel hard done by if a rival incorporating a similar level of technological advancement in its products were exempted. The Centre’s stated objectives for relaxing FDI norms — “improving the availability of such goods for the consumer” and “enhancing the competitiveness of Indian enterprises through access to global designs, technologies and management practices” — would be rendered fruitless if overseas companies, subject to the whims of interpretation, opt out of either entering the market or from making significant investment. Ultimately, keeping it simple works best, especially when it concerns investment rules.

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