India and the EU have locked horns over including retail sector investments in the bilateral free trade pact expected to be sealed soon.

New Delhi is undecided about committing to the existing foreign direct investment regime in retail as it would make tightening of rules in future difficult, but Brussels is not willing to take no for an answer.

“It was easier to say no earlier when we did not allow foreign investment in multi-brand retail. But now with the spate of reforms in retail this year, the pressure on us to include it in the FTA is growing,” a Government official told Business Line.

The pact, officially called the bilateral trade and investment agreement or BTIA, is expected to create additional markets that would almost double bilateral trade to an estimated €150 billion ($200 billion) from about $110 billion last year.

The over five-year-long negotiations cover areas such as goods, services, investments, government procurement and intellectual property.

“The problem facing the Government is whether politically it could get away with taking on binding commitments in retail especially since opening up the sector has been strongly resisted by Opposition parties as well as allies,” the official said.

Brussels wants India to give its investors more liberal access to the Indian market, apart from not tightening present rules in future.

India allows up to 100 per cent FDI in single brand retail and 51 per cent in multi-brand retail subject to 33 per cent purchases from domestic sources.

Other restrictions on multi-brand retail include minimum investment criteria, zonal restrictions and minimum population clause.

“The EU wants fewer restrictions for their retail investors than what is allowed in the existing policy. We are not even sure if we could give them binding commitments on our existing policy,” the official added.

Some experts argue that New Delhi should not be defensive. “What would happen to Ikea’s Rs 10,000- crore investment plans if the next government decides to reverse the retail policy?” said a services expert from a Delhi-based research agency.

The EU should just focus on getting firm commitments on the existing policy for guaranteed immunity against policy flip-flops, said Arpita Mukherjee, Professor, Icrier.

“Our FDI policy in retail has seen a lot of changes over the last few months especially in conditions imposed on investors. EU should just pocket whatever is available for investors at present by making India bind these commitments,” she said.

Mukherjee believes that India should use this bargaining power to get commitment in areas of its trade interest.

“One must remember that FDI restriction is not an entry ban. Even with FDI restrictions foreign retailers can enter India through other routes such as franchising. Why should India then not use the FDI liberalisation as a bargaining tool and benefit from it?” Mukherjee argues.

But officials say that the country must tread cautiously as commitments made in an FTA cannot be withdrawn easily.

“India will have to pay heavily in other areas if it includes retail in the agreement and later makes changes in the existing policy,” the official said.

The commerce and industry is working hard to have a clear position on all contentious issues and get internal clearances before the next meeting of negotiators likely next month.

(This article was published on January 4, 2013)
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