India has witnessed rapid liberalization and globalization in the past two decades. The Indian economy has opened up to foreign investment. The regulatory framework governing the inflow and outflow of funds into and out of India too has become dynamic, adapting to the ever changing demands and needs of time. Foreign Direct Investment ("FDI") in India is governed by the FDI...
India has witnessed rapid liberalization and globalization in the past two decades. The Indian economy has opened up to foreign investment. The regulatory framework governing the inflow and outflow of funds into and out of India too has become dynamic, adapting to the ever changing demands and needs of time.
Foreign Direct Investment ("FDI") in India is governed by the FDI Policy issued from time to time by the Government of India in accordance with the provisions of the Foreign Exchange and Management Act, 1999. A foreign investor can invest in India through the automatic route or through the Government approval route, after obtaining the necessary clearances from the Foreign Investment Promotion Board.
FDI in various sectors has its own benefits including fostering of economic growth, technological developments, importation of modern techniques, gen¬eration of employment opportunities etc. The Government of India regulates FDI in each sector based on the needs and regulatory concerns for that particular sector. Every year, the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry comes out with press notes dealing with the different aspects of FDI for various sectors.
One of the issues which became a topic of heated debate recently was that of permitting FDI in multi-brand retail. The retail industry can be of two kinds (i) Organized and (ii) Unorganized. Organized retail refers to trading activities undertaken by licensed retailers, i.e. those who are registered for sales tax, income tax, etc. These include publicly-traded supermarkets, corporate-backed hypermarkets, retail chains and also privately owned large retail businesses.
Unorganized retailing, on the other hand, refers to traditional formats of lowcost retailing, for example, owner manned general stores, kirana stores, paan/beedi shops, cart and pavement vendors, etc. Indian retail is dominated by unorganized or traditional retail. Recently, in a bid to introduce reforms in the retail sector, the Union Cabinet approved 51% FDI in the multi-brand retail sector. This was done in order to introduce the expertise of retail majors like Walmart, Tesco into the Indian retail sector.
A number of benefits of FDI in multi brand retail sector were cited by the proponents of this reform including the following:
- Generation of employment opportunities;
- Systematized storage and handling techniques which lead to less of damage to perishable products;
- Removal of middlemen leading to more profit to manufacturers/ farmers;
- Boom in the real estate market etc.
The reform was intended to be passed in the midst of an economic slowdown as a measure to boost the economic growth rate. A number of advantages were sought to be achieved through the proposed reform.
However, the idea of allowing 51% FDI in multi-brand retail was met with staunch opposition, not only from rival political parties but also from within the Government. Coalition partners objected to the idea of opening the doors to foreign investment in this sector citing various reasons. A major argument raised against this reform was that the domestic retailers would not be able compete with the huge foreign majors setting base in India as a result of this Government policy and would be forced out of the market.
It was apprehended that the advent of supermarkets would wipe out small retailers, leading to loss of employment. Leader of Opposition in Rajya Sabha Arun Jaitley was quoted saying, "Foreign investors with deep pockets entering this segment will have an adverse impact on our growing domestic retail sector". Whether these arguments are justified remains the moot point. The Government continues to hold that the reforms were intended to benefit the economy as a whole.
There was also an argument by opponents of this reform that throwing the doors open to large and dominant foreign investors may have certain competition concerns and may result in an appreciable adverse effect. on competition in the Indian market. There was an apprehension that global retail giants could resort to predatory pricing to grab control of the supply of essentials. The proponents of this argument however failed to appreciate that the substantive provisions of the Competition Act, 2002 dealing with "Anti Competitive Agreements" and "Abuse of Dominance" have been brought into force.
The Competition Commission of India, the country's anti-trust regulator, has been empowered to act against parties indulging in anti-competitive activities suo moto or based on information received. A number of investigations have already been initiated by the Commission dealing with instances where parties have allegedly abused their dominant position. Stringent penalties have been imposed on parties found guilty of abusing their dominant position.
It can be said that there are sufficient safeguards in the regulatory framework to address the concern of anti-competitive behavior by foreign investors in the retail sector. However, as a result of strong opposition not only from the opposition but also from within the coalition, the Government was forced to defer the reforms envisaged in the multi-brand retail sector and the proposal to allow 51% foreign investment in this sector has been put in abeyance.
The fact that Government has deferred the implementation of this reform has been viewed as a major setback for foreign retail investors eagerly waiting for an opportunity to do business in India. The uncertainty in the political decision making process and the weaknesses attributed to coalition governments have been exposed. Certainty in the functioning of the regulatory mechanism and decision making process is a sine qua non for building investor confidence and for attracting further investments to boost the economy.
Stability of the Government is often demonstrated by its ability to pass and implement reforms which are envisaged for the development of the country. The Government maintains that opening up the multi-brand retail sector to foreign investors is still on its mind and it will continue to pursue this object.Whether the Government will go ahead and reintroduce the reforms is left to be seen. What is certain is that the world is watching in eager anticipation.