In Parliament last week, the floor managers of the United Progressive Alliance (UPA) ensured a clear victory for the government on the question of allowing foreign direct investment, or FDI, in multi-brand retail. That, however, has not dispelled all doubts about the future of foreign investment in the country’s retail sector. Contrary to earlier expectations that a conclusive victory for the government with a vote in Parliament would bolster the confidence of India Inc and foreign investors, there is still no clarity on whether FDI in multi-brand retail has overcome all the political hurdles and the policy change is now irreversible.
Ironically, it is the nature of the UPA victory that has spawned such doubts. It was a bitter battle fought on the floor of the two Houses of Parliament. The debate was as intense as the Congress’ calculations to get the required number of Lok Sabha and Rajya Sabha members to defeat the Opposition’s motion that sought to disallow FDI in multi-brand retail. Eventually, the UPA won as it secured the support of both the Samajwadi Party and the Bahujan Samaj Party. The Bharatiya Janata Party (BJP) was a big loser as a consequence. Worse was the plight of the Left parties, who found, to their chagrin, that the Samajwadi Party, their secular ally, bailed out the Congress.
This is bound to have an impact on the future of the retail FDI policy. Given an opportunity, the BJP, the All India Anna Dravida Munnetra Kazhagam and the Left parties would like to reverse the FDI liberalisation. Indeed, there were Opposition voices during the debate that held out a threat that if they came to power after 2014, the policy on FDI in retail would be rolled back. Simultaneously, there are now talks that the notification to allow FDI in multi-brand retail could still be challenged in the Rajya Sabha since the 30-day limit for raising such objections is not yet over.
The upshot of all this is that even though the UPA has defeated the motion against FDI in retail, foreign investors may still be a little wary and would wait for some more comfort on the durability of such policy change. No corporate entity would like to enter a market where the political climate is so surcharged and political opinion on specific economic policy liberalisation is so sharply divided. So, it is likely that the very purpose of attracting foreign investment by allowing FDI in retail will be defeated because of the manner in which the debate has polarised political opinion. Investors’ confidence, instead of going up, may well have taken a hit.
There is yet another adverse fallout of the way the battle over FDI in multi-brand retail was won by the government. With so many safeguards built into this decision, there are now serious questions on whether the UPA government has set an unhealthy precedent for all future economic policy decisions with regard to liberalising foreign investment. For the first time in India since Independence, the government has introduced an investment policy for a specific sector, whose applicability has been left to the state governments.
So far, policies governing investment used to be qualified by the nature of its ownership or capital, but no restriction was imposed on its location. For an investor, the entire country was treated as a single market. But given the manner in which the FDI policy for retail has been introduced, the investor’s right to access a certain market will now be determined by the state government. You might call it a new phase in India’s federalism — for investors, however, fragmented or limited access that depends on the states can often be counterproductive, taking away a lot of the advantages that accrue from the large size of the Indian market.
Worse, at a time that attempts are being made to introduce a uniform goods and services tax regime for the entire country to facilitate easy and barrier-free trade across states, different FDI policy regimes for retail in states would negate the very advantages that should otherwise accrue from the indirect tax reform initiative. An associated risk would be a demand from political parties and lobbies to extend the same principle of state-specific FDI policy to other sectors. In many cases, acceptance of such a demand would not be feasible because of the nature of the product or service in question. But even if such a demand is made, considerable time and energy would be wasted, in addition to stalling further reform in those areas.
There is yet another risk that has surfaced following the manner in which the UPA got the question of FDI in multi-brand retail debated and voted in its favour. A debate in Parliament has led to a vote on an issue that was hitherto considered to be well within the government’s executive powers and, therefore, not requiring fresh legislative sanction. In the coming months, it is likely that political parties would be encouraged to force more debates in Parliament on government decisions that are within its executive powers. In their defence, they are likely to cite the debate on FDI in multi-brand retail as a precedent. If that were to happen, governance is bound to suffer and the UPA will wonder if its hard-fought victory on the retail FDI issue has imposed a bigger cost on the nation.
