Over the course of the United Progressive Alliance's nine-year tenure two cataclysmic policy initiatives almost brought the government to the verge of losing its majority in Parliament. Three years ago it was the civil nuclear Bill and last year the equally "fissionable" Bill for foreign direct investment (FDI) in retail. Almost a year after what was termed transformational legislation that, among other significant benefits, would bring large FDI inflows, we have not received investment in multi-brand retail. On the contrary, global retail investors have given the government much grief over what they believe is an impractical and confusing policy, requiring numerous clarifications.
The draft policy was circulated over two years ago. In an article, in Business Standard, titled "What a tangled web" (July 29, 2011), I had argued that it contained many pointless guidelines. Subsequently, in an incisive article here titled "Modern retail and fresh produce - cui bono" (November 4, 2012), Professor Shreekant Sambrani had exposed many half-truths offered by the government to justify the key benefits of FDI. Clearly, the basic foundation on which the policy was built seemed to lack the robustness expected of one with such wide impact. With the recent set of clarifications, the government has diluted the original guidelines or made it even more Kafkaesque! One wonders why a team of capable ministers and bureaucrats would create such an effete policy that enthuses none of the stakeholders in the ecosystem.
As I ponder this paradox there are a few basic strategic flaws that are evident. At its core, the policy is based on an artificial and flawed definition, non-existent in the retail industry or seen in other countries, i e multi- and single-brand retail. During the initial liberalisation of FDI, this definition was devised by some creative bureaucrat to differentiate and justify investment in fringe categories such as footwear, apparel and so on while excluding mainstream or food retail. Globally, have you seen any character called the multi-brand and single-brand retailer? Retail businesses operate based on product sets such as food, non-food, apparel and so on or operating formats like hypermarkets and supermarket. The need to then mould policy around this flawed definition and include norms purely to placate opposition led to the fait accompli: the creation of these impractical guidelines. For years, after China allowed foreign investment, retailers were not allowed to set up stores above a certain size within certain zoning limits. This simple guideline ensured hypermarket/big box formats were excluded from areas with high density of traditional stores.
Let me dissect a couple of the key guidelines and clarifications to unravel the maze we have created. Thirty per cent of goods sold were to be procured from medium and small-scale enterprise (MSMEs), classified as those with investment of less than $1 million in plant and machinery. This was meant to display the government's bleeding heart for MSMEs that were expected to be impacted by the deluge of goods global retailers would import from China and other lower-cost producers. It has now been clarified that it will be applicable to those with investment of up to $2 million and that too only at the first engagement. Further, the government has now included under this norm produce procured from farmers and cooperatives. Given that for a food retailer agricultural produce would anyway be a significant portion of sales, the 30-per cent MSME sourcing requirement has probably been surreptitiously diluted down to single digits by including this category!
With the raft of fine print accompanying these clarifications there is ample scope for interpretation by "rent seekers" across government departments at whose mercy the retailer will be to prove compliance. Another key guideline was that of 50 per cent of FDI investment having to be in the back-end, now diluted to 50 per cent of only the initial investment of $100 million. This norm was touted to ensure our creaky supply chain infrastructure would get much-needed doses of investment.
It looks like a year without FDI has led the government to think otherwise. We could have dropped all meaningless norms such as 30 per cent procurement from MSMEs. On the contrary, we could have set a significant investment floor like, say, $300 million to $500 million over a reasonable period, which would have been meaningful for a country like ours and which for a serious global food retailer would not be daunting. FDI was also initially restricted to towns with a population of 1 million or more but the decision has now been left to the states, opening more opportunities for filling local pockets. Qualifying FDI has been clarified to be only in greenfield investment, making it unattractive for global players to build scale through domestic acquisitions. This, in one stroke also put paid the hopes of domestic retailers looking for an overseas saviour, leading to murmurs of it being issued at the behest of one player, reminiscent of the licence raj era style of policy-making.
Only the foolhardy will make investments under the current guidelines and we are not likely to see any FDI from a global retailer till at least the national elections are over and creation afresh of a practical policy. I had closed my earlier article quoting Sir Walter Scott. A more apt epitaph for the current retail FDI scenario would be from the classic Hotel California by the Eagles "You can check out any time but you can never leave"!
The author is a Bangalore-based independent corporate advisor
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
