A bigger bang for retail reform

An opportune time to scrap the fine distinctions for FDI

The government’s approval for Amazon’s entry into food retailing, the first under the policy allowing 100 per cent foreign direct investment (FDI) in food retail chains, could be a good opportunity to scrap the many fine distinctions and confusing conditions that prevail in the retail investment policy as a whole. Big-ticket retail FDI has the potential to significantly expand the market for goods and services, but the incremental pace of reform has meant that India has been unable to maximise the opportunity. This incrementalism was initially on account of some energetic lobbying from domestic retailers. 

Thus, in 2006, the United Progressive Alliance permitted 100 per cent FDI by the automatic route only in the wholesale or cash-and-carry business and 51 per cent in “single brand” retail subject to approval from the now defunct Foreign Investment Promotion Board. FDI in “multi-brand” retail was prohibited. This asymmetry persisted till 2012 when domestic retailers, struggling with significant debt, started seeking a less restrictive FDI policy. The government obliged but added many conditions. 

Single-brand retail was brought on the automatic route for up to 51 per cent and was subject to government approval beyond that. There was the additional rider that those foreign retailers that wanted a shareholding above 51 per cent had to source at least 30 per cent of their merchandise from small and cottage industries. Multi-brand retail was liberalised to allow 51 per cent FDI, but at least half of the first $100-million investment had to be in back-end support infrastructure. Also, multi-brand retail was allowed subject to states’ approving them — a condition that continues though it should have been scrapped.

It says much for the India opportunity that even these intricate and often opaque restrictions attracted interest from names such as Carrefour, Metro, Walmart (in a tie-up with the Bharti group) and Tesco (with the Tata group). Ikea, H&M, Adidas and Swatch also showed interest in setting up shop. But with the riders in place, there were withdrawals too: The Bharti-Walmart venture split in 2013 and Carrefour exited the next year. In 2015, the National Democratic Alliance relaxed the time-period for sourcing norms for single-brand retailers and allowed them to enter online trading. At the same time, the government proposed to exempt Apple from sourcing norms on the grounds that it was bringing in cutting-edge technology, introducing an element of ill-advised exceptionalism. That proposal is still being discussed. By 2016, the government officially allowed 100 per cent FDI in e-tailers in the marketplace model — some years after the fact — but inserted inexplicable riders on premium pricing and group-company sales. 

The existence of multiple retail policies, all of them subject to negotiation, does not enhance India’s reputation in doing business and makes little sense. Raisina Hill was able to push through the food retail policy, announced in last year’s Union Budget, without significant protest from traditional vested interests such as supply chain middlemen or small retailers. This suggests that the political compulsions that created complexities in the retail policy have receded. A uniform norm for local sourcing would be an unexceptional conditionality, but it would benefit farmers, consumers and suppliers enormously if the other differentials were scrapped.