Relaxation in FDI Norms stand against Standing Committee Recommendations

As the nation gears to witness the Monsoon session beginning on Monday, a report of Standing Committee Report on FDI is set to be tabled in the Parliament. The recent cabinet decision to ease FDI norms in multi-brand retail stands in the face of recommendations given by Standing Committee Report on impact of multi brand retail on MSME sector. The three major changes that have been approved by the Union Cabinet are contrary to the recommendations of the Standing Committee which explicitly 'cautions against any dilutions in sourcing norms'.

The decision to ease the norms around the number of cities that qualify for FDI in multi-brand retail is in stark contrast to the recommendations of the standing committee. The committee had even criticized the flexibility to open retail sales outlets in cities of their choice, in States and Union Territories which do not have a city with population of more than ten lakh. It is fortiori that the current ease of norms would be contrary to views of the committee. Some officials from the committee argue that giving discretion to state governments would open up more avenues for corruption and arbitrariness in policy decisions. But the industry is positive that there is at least 'some window' for entry.

The easing of investment in the back-end infrastructure puts the questions of the definition of 'front end' and 'back end' operations. Officials from the committee admit that there is an absence of clarity on definition of front and back end operation. The report notes the inconsistencies in government claims like it is argued that most jobs would be created in front end while government hopes that the integration of MSME would be at the back end. Surprisingly no one in the committee knows where the government gets the 30 per cent sourcing figure from. “You should ask the government about it, you also have it in single brand retail”, said a senior official. The committee also doubts if FDI policy in single brand retail has created any back end infrastructure and recommends a study to be carried out on it. The committee had even criticized the government for allowing back end operations in states not permitting FDI.

Any 'dilution' in sourcing has been said to be detrimental to the MSME sector.  According to PM's task Force Report of January, 2010 MSME sector contributes to 8 per cent of GDP, 45 per cent of manufactured output and 40 per cent of country's exports.

One of the questions that the report raises is the validity of the data on which the government has relied in going ahead with the FDI policy. The committee remarks that it finds the 'arrangement rather strange' where government relies on independent research body which in turns relies on data by non-government source. Indian Council for Research on International Economic Relations (ICRIER)- the organization that carried out the research for government- refutes these observations arguing that it conducted nation-wide surveys before submitting its report to the government.

The Standing Committee is not alone in expressing these views. Parliamentary Committee on Commerce, 2009 and Prime Minister's Task Force Committee Report on FDI, 2010 had raised similar concerns. Industry players dismissed these observations as mere 'apprehensions' and 'ideological standpoints without substance'.