Cabinet to decide on raising FDI limit today

As it meets tomorrow, the Union Cabinet is likely to take up a proposal of hiking foreign direct investment in single-brand retail to 100 per cent from the current 51 per cent and allowing 51 per cent FDI in multi-brand retail trading. Finally, it seems the UPA government is sure to remove the tag of “policy paralysis” — rather, bite the bullet.

The Cabinet is also likely to take up the new Companies Bill after differences over market regulator Securities and Exchange Board of India’s jurisdictions in case of regulatory overlaps have been ironed out between the Finance and Corporate Affairs Ministries.

At present, India allows 100 per cent FDI in cash-and-carry wholesale trade that is business-to-business. It permits 51 per cent in single-brand retail such as Louis Vuitton, Jimmy Choo or Fendi. However, FDI is not allowed in multibrand retailing like Walmart, Carrefour and Tesco. The Cabinet will tomorrow be taking for approval both the proposals of increasing the FDI limit in single-brand retail and permitting 51 per cent in multi-brand retail together, a senior official from the Ministry of Commerce and Industry told Business Standard.

Last week, the Department of Industrial Policy and Promotion (DIPP) had sent the final note to the Cabinet, suggesting both the measures after thorough inter-ministerial consultations.

“This had been going on for a long time now,” pointed out Arvind Singhal, chairman, Technopak. “This decision could not have come at a more inopportune moment when foreign retailers are already facing a whole of lot of issues in their home markets with subdued demand. It is not as if the moment a decision is taken, a dozen of retailers with billions of dollars would enter India.”

In July this year, a committee of secretaries (CoS) under the chairmanship of cabinet secretary Ajit Kumar Seth did give an “in principle” nod to the proposal of allowing 51 per cent FDI in multi-brand retail — based on the majority consensus. However, foreign retailers would be allowed in multi-brand retail subject to stringent riders. According to the draft Cabinet note, retailers may have to source almost a third of their merchandise from small Indian manufacturers. Also, the minimum amount to be brought in by the foreign investor would be $100 million, and at least 50 per cent of the total FDI bought in shall be invested in back-end infrastructure.

According to Technopak’s Singhal, these riders could act as a major deterrent for the retailers in entering the Indian market. The process had been going on for last one year when the DIPP, which functions under the ministry of commerce and industry, had floated a discussion paper to open up the multibrand retail sector for FDI in July 2010. This was followed by the formation of a committee under the ministry of consumer affairs and public distribution, with representatives from the ministries of commerce and industry, finance, agriculture and food processing industries as its members.

Now, the ministry of consumer affairs and public distribution has suggested putting a threshold of 49 per cent for FDI, while the micro, small and medium enterprises ministry has said the government should limit FDI in multi-brand retail to 18 per cent. This will be yet another feather on the hat of minister of commerce and industry and textiles Anand Sharma, who was recently credited for giving India its first-ever National Manufacturing Policy. Foreign retailers had been lobbying for years to allow FDI in multi-brand retail.

Ironically, domestic multibrand retailers such as the Future Group, Tata Group’s Trent, Reliance Retail and Mahindra Retail are doing robust business in the country and all have substantially expanded their networks around the country.

According to the critics, opening up the sector for FDI would kill the small-scale retailers due to severe competition rendering them unemployed. This would also impact the farmers due to increased control of corporate conglomerates on the sector.

Global multibrand retail chains have been pushing India to open up the sector for FDI in order to tap the billion-plus consumers market. International retail juggernauts such as Wal-Mart, Carrefour and METRO have opened up their cash-and-carry stores in order to tap the market. According to a study conducted ICRIER in 2008 on ‘Impact of Organised Retail on Unorganised Sector’, places with organised retail chains witnessed adverse impact on the sales and profit of the unorganised retailers.

Companies Bill, when enacted, will replace the existing Companies Act. It is likely to propose more teeth to the Serious Frauds Office to probe cases like Satyam Fraud.

The Bill may not make it mandatory for companies to earmark certain proportion of their profits for corporate social responsibility but ask them to mention it in their annual reports if they are not doing so.