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The proposed easing of foreign direct investment norms in multi-brand retail to attract elusive foreign retailers like Walmart and Tesco is likely to face rough weather not just in the Cabinet from opposing Ministries but also in Parliament as the Foreign Exchange Management Act has to be amended for legal validity of the changed rules.
While the Ministry of Micro, Small and Medium Enterprises would contest the proposed easing of mandatory sourcing norms from the small sector when the Cabinet takes up the matter for its consideration, the bigger challenge would be to get Parliament’s approval for amending FEMA.
“Since foreign investment in multi-brand retail continues to be a politically sensitive topic and most Opposition parties and a number of UPA supporters have been openly criticising the policy, amending FEMA to dilute the policy further may not be easy,” an official from the Industry Department told Business Line .
The UPA Government faced a tough time in Parliament less than a year ago when the FEMA needed to be amended following the Government’s decision to open up the multi-brand retail sector to foreign investment by allowing 51 per cent FDI.
Lukewarm response
The Government is now attempting to make the policy more investor friendly by easing clauses to protect domestic small sector and build back-end infrastructure out of sheer desperation as no foreign investor has made a proposal to invest in the sector so far.
The Industry Department has floated a note proposing relaxation in sourcing and investment norms that is likely to be taken up by the Cabinet for its consideration.
According to the proposed changes, foreign investors in the multi-brand retail sector need not invest in back-end infrastructure like ware-houses and cold storages every time they bring fresh investments into the country.
This would mean that the mandatory investment clause that states that $50 million or 50 per cent of the total investment in a multi-brand retail venture be invested in back-end infrastructure would apply only the first time a foreign company is bringing investments into the country.
It also seeks to relax the mandatory 30 per cent sourcing condition from the small industry by increasing the criteria for the small sector from a maximum $1 million investments in plant and machinery to $2 million. The note also proposes to let small sector suppliers continue to supply to multi-brand retail units after they cross the minimum investments limit for a period of three years.
“The MSME Ministry, in its response to the Cabinet note, has said that relaxations in the sourcing norms would result in foreign companies importing more and buying less locally. It does not want to support the change,” the official said, adding that the DIPP’s views were that in the absence of such relaxations, retailers would have to keep changing their vendors frequently.
The Government also wants to give States the flexibility to relax the minimum population threshold of 10 lakh in cities where foreign investors could set up multi-brand retail ventures.
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