Realign FDI in retail: Existing policy is plagued with convoluted riders

The impending Walmart-Flipkart deal provides the government with a useful opportunity to realign its retail policies to offer an overarching enabling environment for foreign direct investment (FDI). Indeed, the tie-up between the world’s largest retailer and India’s largest online retailer points to the urgent need for policymakers to approach brick-and-mortar retail and online commerce in a seamless manner and focus on maximising the value chain for investors and consumers. The distinctions between cash-and-carry and single-brand retail, in both of which 100 per cent FDI is permitted, and multi-brand retail, in which foreign investors can take a 51 per cent stake, are cases in point. The realities of the emerging retail paradigms globally are rendering these definitional differences illogical. 

The other irrational element of the policy are the conditions attached. Single-brand retailers have to source 30 per cent of the value of their goods exclusively from India — the original proposal for 30 per cent from small and medium units was relaxed — for five years. For FDI in multi-brand retail, the policy is even more restrictive: It stipulates a minimum investment of 

$100 million, at least half of which must be invested in back-end infrastructure, and a 30 per cent local sourcing requirement that, too, only in cities with populations of over one million. It is worth noting that these restrictions raise barriers for investors without offering consumers tangible benefits. For instance, sourcing restrictions apply only to investors like IKEA, Apple or H&M that choose to set up wholly-owned chains. But scores of brands from Marks & Spencer to Zara that opt to set up their chains via Indian joint ventures are free from all these conditions. In e-commerce, for which a policy was first articulated in 2016, the government allows FDI only in “marketplace models” (that is, as a platform to connect buyers and sellers), bans discounting by the platform and restricts sales from a group company or any one vendor at 25 per cent (a new policy is due in six months). 

The impact of these convoluted riders is visible in the poor response by global retail investment in one of the world’s largest markets. French retailer Carrefour, one of the earliest multinational entrants in Indian retail in the cash-and-carry business, has all but exited in less than a decade. Tesco made an entry via a joint venture with the Tata group only in 2015 (it has had back-office operations here for some years). Walmart is making a second attempt to enter India after over a decade of trying (it exited a joint venture with Bharti about five years ago). In food retailing, in which the government permitted 100 per cent FDI in 2017, only one foreign entity has entered the lists — Amazon. All this is small beer for a market that offers a $650 billion opportunity. The potential multiplier effect on employment generation and re-energising the agriculture market are obvious. These niggling elements of retail policy have no relevance and should speedily be scrapped.