PMEAC for 49% FDI in multi-brand retail

Rangarajan says this would signal govt?s commitment to furthering reforms wants Centre to rein in fiscal deficit at 5.1%

As the government struggles to build a political consensus on foreign direct investment (FDI) in multi-brand retail, the Prime Ministers’ Economic Advisory Council (PMEAC) on Friday suggested the government initially allow up to 49 per cent FDI in the sector, instead of the 51 per cent approved by the Cabinet.

Releasing the committee’s outlook for 2012-13, PMEAC Chairman C Rangarajan said allowing 49 per cent FDI would signal the government’s commitment to furthering the process of reforms. “You have to put in effort for policy action. So, we have suggested allowing 49 per cent FDI in multi-brand retail to begin with, to bring more people on board,” Rangarajan said.

However, before taking a decision, top international retailers should be consulted, the report suggested, adding this would ensure investors favoured the decision, and states favouring the move could implement it soon.

Meanwhile, Rajasthan on Friday joined Delhi, Uttarakhand and Manipur in extending support to open the multi-brand sector to FDI. In a letter to Commerce and Industry Minister Anand Sharma, Rajasthan Chief Minister Ashok Gehlot stated, “I would like to assure the cooperation and support of the Raja-sthan government for liberalising and opening of this sector.”

The PMEAC report stated FDI was an important mechanism for channelling capital and technology and promoting growth. It added FDI in multi-brand retail would help attract investment and improve the supply chain infrastructure for farm produce and related activities. This, in turn, would help farmers and producers, benefit customers and create jobs.

The council also suggested allowing foreign airlines to bring in FDI of up to 49 per cent in Indian airlines.

FDI is vital to help tackle India’s declining investment rate, which stood at 34.7 per cent in 2011-12 and 2010-11. For this financial year, PMEAC pegged it at 35.3 per cent. This, too, would be lower than the 38.1 per cent investment rate in the pre-crisis period of 2007-08.

The domestic savings rate declined from 32 per cent in 2010-11 to 30.4 per cent in 2011-12. For 2012-13, PMEAC estimated it at 31.7 per cent. The savings rate in the country has been declining, owing to pressure on margins of companies and a decline in household savings. The government’s savings also entered negative territory due to the subsidy burden.

Therefore, PMEAC suggested the Centre rein in fiscal deficit at the budgeted 5.1 per cent, even as it said recent slippages in fiscal deficit raised questions on the government’s commitment. According to the International Monetary Fund’s fiscal monitor released in April, India was among the most fiscally stressed emerging market economies. PMEAC member Govinda Rao said reining in fiscal deficit at the budgeted target was “non-negotiable.” He, however, added fertiliser subsidy might see a decline this year due to the weak monsoon. Fertiliser subsidy in 2011-12 stood at Rs 67,000 crore.

As merchandise exports contracted for three consecutive months so far this financial year, the council said it expected growth in outbound shipments to be lower than the commerce ministry’s projection.

Against the ministry’s projection of $360 billion f exports this financial year, PMEAC estimated exports at $334 billion.

PMEAC also suggested the government continue to negotiate with states to roll out the Goods and Services Tax. It said the negotiations were stuck on the issue of paying compensation to the Centre for loss in revenue due to a cut in central sales tax.

On recent criticism of disconnect between the Index of Industrial Production (IIP) and sales of companies, PMEAC member Saumitra Chaudhuri, said, “Prima facie, there is a problem in IIP. You can use corporate results as a validation to see whether there is a match or not.” Rangarajan said data from companies was corroborative evidence and if suitably adjusted for inflation, it could give an indication.