Not a common market

States' approval for FDI sets a dangerous precedent

Many questions remain to be answered about how the government’s recent notification of foreign direct investment (FDI) in retail is to be worked out. Some of these, presumably, will be answered as the new dispensation is put into operation. Others, however, deserve immediate comment. One such is the amendment of the previous requirement that single-brand retailers in which foreign shareholders have a majority must source 30 per cent of their stock from small and medium enterprises in India. “Mandatory”, in the original notification, has now been made “preferably”. Naturally, this renders the whole clause meaningless. However, that 30 per cent still must be sourced from India and this will not be evaluated yearly, but by statutory auditors over a five-year time horizon. It is not hard to see how easy this requirement could be to evade. The government should not deceive observers: it has dropped its original conditions on single-brand retail. This may have been done for the best of reasons – the conditions never made much sense – but, if there are good reasons, the government should be open about them. Otherwise, it looks like the government is naming conditions to make the change saleable which it does not intend to enforce. In effect, this is similar to the “restrictions” on multi-brand retail — to only cities with a population above one million. If multi-brand retail is so beneficial, why these restrictions? Are they even real? And would anyone locate a huge supermarket in a city with insufficient scale for the business’ tiny margins to kick in?

 

More worrying, however, are the implications of the clever political trick the government tried in order to make multi-brand retail more palatable. Allowing each state the power to implement the new FDI cap as and when it sees fit raises several important questions. Of course, it vastly increases the complexity of any foreign investment into India’s troubled big retailers — which have a presence, naturally, even in states that do not intend to immediately implement the notification. Price discovery in the sector, thus, will become difficult, requiring Indian companies to devise complex special purpose vehicles to separate the ownership of stores that are located in states that do not welcome foreign investment in retail. Indian retailers will not benefit as much as will the owners of foreign capital.

However, sectoral concerns are minor when set against the damage this does as a precedent. What is to become of India’s economic unity, if even basic decisions within the Centre’s remit are to be implemented only in those states that agree with them? It is true that this has not happened till now — but making even a straightforward change in FDI rules into an enabling provision is a dangerous precedent. National economic policy cannot be carried out by a “coalition of the willing”. India is entering a period in which increasing power will flow to political leaders from the states. In some cases this is a good thing, enabling greater accountability and policy experimentation. It is not beneficial when it moves India further away from being a common market. The benefits of a common market – specialisation, lower costs and so on – are widely understood. India needs to speed up its movement towards a genuine, unitary market structure. Instead, the precedent being set by FDI in retail could halt, and even reverse, that necessary trend.