FDI in retail: Why govt's policy is completely flawed

The conditions imposed on prospective investors betray a lack of understanding of the dynamics of the business.

After years of heated discussions on opening multi-brand retail to foreign investors and the eventual endorsement of the policy after a cliff-hanger vote in Parliament in December 2012, it would be a matter of great chagrin to the government and the mandarins who drafted the policy that no proposal has been submitted for approval.

Instead of the billions in dollars and euros that the ruling coalition (especially the Congress) believed would flow into India through this "major" reform, the government seems to have only received requests for clarifications on various clauses and so-called "riders" that have come along with this policy.

It was quite apparent to those who have any understanding of the dynamics of the corporatised, large-scale retail business that the government's policy was completely flawed conceptually and impractical to implement practically.

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These issues would now, hopefully, be amply clear to the government and its bureaucrats. In their quest to address the few legitimate and mostly irrational fears of those stridently opposed to opening India's retail sector to international investment, the government has shot itself in the foot by imposing a plethora of impractical conditions.

It then sowed more seeds of doubt by leaving the final decision in the hands of each of the 28 states in the Union of India.

The most onerous conditions include:

• A minimum investment of $100 million of which 50 per cent must be in the "back-end". But there is no clarity on what the "back-end" would mean since it would differ from one kind of retail business to another.

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For example, a consumer electronics retailer or a clothing retailer does not need any "cold chain" or even multiple "distribution" centres, whereas a food retailer would need a more complex supply chain;

• Mandatory sourcing of a minimum 30 per cent of merchandise from domestic micro, small and medium enterprises.
  
  This, again, reflects a total lack of understanding on the government's part about the impracticality of this condition for most categories of retailers - consumer electronics and durables, home textiles and home decor and so on.

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• State-by-state approval for operating the retail business. That leaves the risk wide open as to what happens to the approvals and the investments on the ground when a new, FDI-opposed government takes charge and finally,
  
• The totally inexplicable disallowance of e-commerce when the rest of the world is seeing multi-channel retail as the way ahead and believes that e-tail would be an increasingly more important channel for almost all retail businesses.
  
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India desperately needs to modernise of the various supply chains between the farmer and the consumer, and the manufacturers of various consumer products and the final consumer.

India also needs some consolidation and some compacting of these supply chains - not only to make them more cost-efficient, but also to plug leakages of government (both states and Central) tax revenues.

This modernisation will takes decades of effort and tens of billions of dollars of investment in the entire supply chain, starting from the producers and right up to the point of delivery (or retail) to the consumer.

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Practically, no large retailer in the world has the resources or the ability to invest in various supply chains, hence the global trend is to have specific specialist companies make the requisite investment in specific areas of the supply chain.

For example, logistics companies now invest not only in shipping and delivery but also in warehouses, product companies invest in increasing capacity or creation of new facilities to produce for the specific requirements of retailers, information technology companies invest in providing technology solutions that are increasingly on a pay-per-use model rather than a one-time (high) capital investment by the retailer and so on.

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Since Parliament (and subsequently, the Supreme Court) has already endorsed to foreign investment in the retail sector, and the FDI policy does not require to be ratified through any parliamentary Bill, the government should take immediate steps to make the policy pragmatic and practical to implement.

There is no reason to put conditions such as mandatory sourcing from micro and small enterprises since most retailers would anyway source merchandise that is largely produced in India.

There is also no reason to put conditions relating to the amount of investment and where such investment has to be made.

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Some retailers will put billions of dollars in investment over time if they succeed, and some would be content to play a marginal role in the Indian market.

There is also no reason to keep e-commerce out of the ambit of approval since multi-channel retail operations are, or will soon be, a key to financial success for almost all retail businesses. Finally, once the retailer has been given approval to operate in India by the Government of India, no condition should be imposed on it to take further approvals state by state.

Instead, the government should encourage the Competition Commission of India and the consumer affairs ministry to strengthen its own understanding of the retail business and prevent the emergence of dominance of any single or a small group of large retailers, or indulgence in anti-consumer practices by retail businesses, irrespective of the origin of their ownership.

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Finally, if the government wishes to extract some additional advantage for India from multinational retailers, it may consider putting a simple condition relating to a mandatory, minimum export obligation linked to the value of retail business they do in India (for a limited period - say, the first 10 years of retail operations or making the investment in an existing Indian operation).

This could expand India's export basket and bring in billions more dollars and euros into the country.