Has India done a China to its trade partners? Against huge opposition and popular discontent over the years, the Cabinet last week cleared 51 per cent foreign direct investment (FDI) in multi-brand retail and allowed 100 per cent FDI in single-brand retail. The move appears crafty in that it tries to change the perception of a reform impasse in the government while simultaneously aiding India’s negotiators to meet their peers with more confidence at the forthcoming World Trade Organisation meeting. This is akin to the recent Chinese practice of declaring its intention to introduce flexibility in its currency pegs and related financial sector reforms before important multilateral meetings like the G20 mostly to negate potential public censure at these meetings.
Now that the dust on opening up India to foreign retailers is likely to settle shortly, analysts and policy makers need to focus on the impact the policy will have on the domestic economy and, more importantly, on the regulatory infrastructure and monitoring mechanisms that needs to be in place for the country’s producers and consumers to benefit.
The stated purpose for liberalising FDI in retail is that it will attract investments for modernising India’s supply-chain infrastructure, especially for the agricultural sector, in turn providing better returns to farmers and small agro-processing units through enhanced direct sourcing as well as curbing inflation by reducing wastage. To ensure these benefits, the government has proposed various conditions and regulatory limitations on foreign investors — zoning regulations and investment norms such as stipulating that over half of the investment should be in back-end infrastructure and cold-storage facilities. For multi-brand retail, fresh farm produce cannot be branded and 30 per cent of the inputs have to be sourced from small enterprises.
All this raises concerns about the enforceability of these norms and the monitoring mechanisms that are missing at the moment, including an evaluation of the viability of an independent regulator for the sector. It may be recalled that the last has been a long-standing demand from the industry, especially in view of recent favourable experience in India upon the introduction of similar regulatory bodies in some economic sectors. As is well known, the retail distribution sector does not only have a very large number of players, it is also dominated by the unorganised sector. Though the sector is not unregulated, most of the (domestic) players find it easy to enter and exit the market, despite the fact that they need more than 30 licences and regulatory clearances to operate. Even if these approvals are justified, they are deemed bothersome and time-consuming by all operators. Not surprisingly, therefore, the industry has been demanding a consolidation of the regulations and regulatory bodies and calling for an independent regulator.
But do we really need a retail regulator? The efficacy of a central regulator in a sector with largely state jurisdiction is open to question, especially in India where the letter and spirit of the law and its implementation tend to vary widely. Our deliberations with consumers, sector experts and industry stakeholders for a recent Consumer Unity and Trust Society (CUTS) study indicate that the demand for a central regulator in retail has arisen from the distribution concerns (market fragmentation and implementation of state-level Agriculture Produce Market Committee or APMC regulations). Most think it is better to consolidate, rationalise and harmonise existing regulations rather than create new regulatory bodies. They are also of the view that since the sector is largely open and there are no major competition concerns that need new regulatory intervention, the existing market distortion should ideally be dealt with by the Competition Commission of India under the Competition Act. A central retail regulator, thus, would have limited relevance.
That said, a majority of the respondents in our consumer perception survey (conducted in the first half of 2011 across 11 states) agreed that an independent regulatory commission would be helpful if it could urgently redress the more important concern of malpractice. Addressing the onerous licensing requirements stemming mainly from red tape, multiple approvals and the implementation gap in regulations in addition to the infamous inspector raj should be the first task of regulatory reforms. Currently, such complaints tend to fall between the cracks of multiple regulatory organisations. However, when queried in detail about structuring and defining the role of the independent regulator, most stakeholders wanted a “single window” for information, licences and approvals, and for troubleshooting and conformity, just like a business facilitation centre for industry.
Further, given the quasi-federal nature of the sector’s governance, these expectations need to be met by the state regulatory bodies, which need to be reconstituted in a manner that fairly represents the interests of all the stakeholders under the supervision of the state administration, and do not overly favour the concerns of intermediaries that have better lobbying power. Given this, unless the state governments stop playing politics, the positive impact of this policy reform on both small producers and the consuming masses will never be observed. And the prophecy of the protectionists would then come true.
The author is Senior Fellow, CUTS Institute for Regulation and Competition (CIRC) and Research Adviser, CUTS International. These views are personal.