Less discretion

Time to review policy on single-brand retail restrictions

The Foreign Investment Promotion Board, or FIPB, has agreed to the proposal of Apple Inc. to set up its own retail stores in the country — but has added the proviso that 30 per cent of the value of its sales should be sourced from the Indian market. This will be a tough challenge for the maker of popular gadgets like the iPhone, iPad and MacBook, since none of these are manufactured domestically. After dithering on the matter for a long time, the government finally allowed up to 51 per cent foreign direct investment in single-brand retail a few years ago, but inserted the restrictive 30 per cent clause in an attempt to placate local retailers who have for long resisted opening up the sector to overseas entities. It was subsequently decided that the clause would be waived when the foreign company promises to bring in “cutting-edge” and “state-of-the-art” technology to India. It has been reported that the Department of Industrial Policy & Promotion in the Ministry of Commerce and Industry, had told the FIPB that the condition on local sourcing could be set aside for the proposal from Apple Inc. Yet, the FIPB has chosen not to do so — it is obviously not convinced that what Apple Inc. wants to sell indeed represents cutting-edge and state-of-the-art technology.

This instance once again demonstrates that the condition for the waiver is subjective, which leads to bureaucratic or even political discretion. If the government is serious about improving the ease of doing business in India, such discretionary powers need to be removed. Or else, efforts to make the country an attractive destination for foreign companies are likely to fail. It is difficult to say whether the FIPB’s decision is because of lobbying by the rivals of Apple Inc. to block its entry, or if it is because of the government’s unhappiness over the Cupertino-headquartered company's failure to give a categorical commitment on manufacturing in India — but the fact that the process is subject to discretion will lead to such questions being raised. This is not going to be beneficial for the country’s image.

The solution is to drop the local sourcing clause in its entirety for all proposals of foreign investment in single-brand retail. That would deny FIPB any discretion in this matter and add to the cause of transparency. It has been reported that the government may close down the FIPB in the future, and leave it to the sector regulators to ensure that all foreign investment guidelines are met by the investors. But the change in the rule for local sourcing should precede that. And, as far as Apple Inc. “making in India” is concerned, the matter cannot be forced. It will set up a factory once the market for its products attains critical mass, the country has a vibrant and efficient component manufacturing base and, finally, when the investment conditions are right. At the end of the day, it is a business decision that the company has to make, and the government should not force this decision by putting up hurdles for the company’s plans to retail its products in India. Its presence, and that of its competitors, will only add to the consumer’s choice, which should be encouraged. By stipulating that such companies locally procure 30 per cent of what they sell, the government has gained little, but consumers have been hurt.