A positive move

FDI policy should be supplemented with wider reforms

The Union Cabinet on Wednesday liberalised foreign direct investment (FDI) norms in areas such as single-brand retail, contract manufacturing, and the coal sector. Of course, the most-awaited change was in sourcing norms for single-brand retail companies. While the government has not removed the 30 per cent sourcing requirement, compliance has indeed been made easier. For instance, local sourcing can now be met as an average of the first five years. This will give retailers more flexibility in the initial years. Further, goods procured for exports by single-brand retailers will be factored in while calculating the percentage of local sourcing.
 

Given the possibilities in the retail sector, increasing flexibility should help bring more foreign investment. For instance, a recent report by Deloitte showed that the retail market is likely to grow to $1.2 trillion by 2021, compared to its size of $795 billion in 2017. The share of organised retail, excluding e-commerce, is likely to double from 9 per cent in 2017 to 18 per cent by 2021. Further, the penetration of the internet will help improve the share of online retail. In this context, the government has also changed the e-commerce norms for single-brand retailers. They have been allowed to sell online on condition that they open physical stores within two years of starting online sales. With the easing of norms for single-brand foreign retail, the government should now consider allowing FDI in multi-brand retail. This will not only help bring in a significant amount of investment but will also improve supply chains, and the agriculture sector could become a big beneficiary.

While the decision to allow 100 per cent FDI in commercial coal mining and related investment (earlier it was allowed for captive consumption only) is expected to give a boost to private miners and introduce competition for Coal India, it remains to be seen if global companies would be interested in the sector. The other significant decision was allowing 100 per cent FDI under the automatic route in contract manufacturing. The idea is that it will help India integrate into the global value chain. Since a number of companies are moving out of China because of rising trade tensions with the US, some of them can look at India as an option to relocate. This will also allow foreign retailers to procure goods more easily and meet the local sourcing norm.

While these are welcome developments, FDI policy is only the first step. If India intends to be an important part of the global value chain, it has to think beyond the idea of import substitution and ease trade restriction. Frequent changes in tariffs, as has been the case in recent years, create friction and uncertainty. Global companies may not be willing to work with suppliers located in a country with an unpredictable and unfavourable tariff structure. Further, the other big obstacle in attracting investment in manufacturing is India’s inflexible land and labour market. The government should address these issues to incentivise both global and domestic investment, because the absence of wider policy reforms can restrict actual gains.