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While the government has relaxed norms recently, Arvind Singhal, Managing Director & Chairman of Technopak Advisors feels, there are fundamental flaws in the policy which are still preventing foreign giants from committing big money to India.
Here are the top 5 sticking points according to Technopak:
#1 MINIMUM INVESTMENT OF $100 MN
The policy mandates a minimum $100 million investment by the foreign retailer of which $50 million must be in the backend. Since FDI is capped at 51%, the Indian partner will have to bring in $100 million equity, so that the foreign partner does not breach the FDI cap. This means a $200 million investment totally. Smaller retailers i.e. a clothing or consumer electronics retailer don’t A) need so much money to be put in the backend B) the revised rules state that only 50% of the first tranche must be invested in backend infrastructure, while operationally more money for backend operations would be required at a later stage, once the business matures.
#2 ONLY GREENFIELD INVESTMENTS
The $50 million investment in back-end operations will have to be used for creating greenfield infrastructure. This means, if an Indian partner has already invested in existing back-end operations, that spend will not be counted, as one of the key motives of the government for opening up FDI, was the desire to finance supply chain infrastructure.
#3 30% MANDATORY SOURCING FROM SMEs
Foreign retailers are not comfortable with this norm because of fears about quality of vendors, impracticality of implementation particularly for retailers in categories like consumer electronics and durables. If a Best Buy for example sets up shop in India, it will not be possible for them to source TVs, microwaves and refrigerators from unbranded SMEs. While the government has diluted this norm by saying 30% sourcing will be done only at the time of start of business (or first engagement with vendor) and farmers and agricultural co-operatives will be included in these conditions, many category of products will not benefit from this dilution. Foreign retailers also complain that domestic retailers aren’t bound by these sourcing norms, so there is no level playing field.
#4 STATE PERMISSIONS
The policy mandates that states will have a final say on permissions. Foreign retailers are worried that this will add to the red tape. Instead of one clearance, they will now have to get 29 clearances. There are also concerns about a reversal in state policies, which can put investments into jeopardy. The only dilution that the government brought about in this respect is relaxing the condition that retailers can set up stores only in cities with a population of 10 lakh. Instead states have now been given the discretion, and will be allowed to implement this policy in towns with a lesser population. Retailers however say that risk of a flip-flop by the state in case of a change of government is a bigger issue that has not been addressed.
#5 APMC RULES
The APMC rules do not come under the purview of the FDI policy, but hold a key to making the retail reforms a success. Out of 35 states, barely 17 have amended their AMPC Acts allowing direct procurement and marketing from farmers, a key to resolving distribution hurdles. Experience of domestic retailers also shows that they are having to bear the brunt of poor infrastructure, inter state border barriers and multiple tax barriers, all of which has dimmed enthusiasm of foreign investors.
Hectic negotiations are underway between potential investors and government agencies, but looks like it is going to be a long haul before these issues are ironed out and actual dollars start flowing into India. Experts also say that most investors are adopting a wait and watch approach before the elections given that parties like the BJP have in the past, threatened to repeal the policy should they come to power.
