S Murlidharan

FDI in retail — devil lies in the detail

S.MURLIDHARAN | Updated on March 12, 2018

Congress spokespersons have been saying that the government’s decision to allow foreign multi-brand retail chains to set shop in India is subject to the concerned State government’s approval under municipal laws such as the Shops and Establishments Act — since trade and commerce come under the State List.

In other words, if a State government does not want Wal-Mart to set shop anywhere in the State, so be it. Predictably, the decision to operationalise the notification, kept in suspended animation for close to 10 months, has polarised the polity — with Opposition States upping the ante and the Congress-ruled States rallying round the UPA government.

But can the nation be divided into regions for the sake of businesses like organised farm retail?

To wit, let us say Wal-Mart sets shop in New Delhi, as it can, given the population of Delhi is more than 10 lakh, and sources luscious mangoes from the neighbouring Uttar Pradesh.

In keeping with the mandate to invest at least 50 per cent of the FDI component in back-end infrastructure, Wal-Mart will have to invest in manufacturing and processing facilities, cold storages and other logistics in UP.

To be sure, the government notification does not contemplate a back-to-back relationship between a particular front-end investment and the related back-end investment; it contemplates that overall, 50 per cent of the FDI must find its way into back-end operations anywhere in India.

But the issue still remains whether it would be kosher for Wal-Mart, for example, to not open front-end shops in UP, but open cold storages and processing centres there?

Even if the State governments opposed to front-end stores welcome the foreign retail chains to open factories and warehouses (in their States), would it not make cost sense for an investor to sell some of the items he has sourced straightaway at the procurement centre (through its front-end stores), instead of storing and transporting them in refrigerated vehicles at considerable expenditure?

The point is, despite the keenness of the trade to transport food items and other perishables to distant consumption centres transcending national borders, often, it makes eminent sense to sell some of them at the point of production/procurement to the extent it can be absorbed by the market there.

In the event, Wal-Mart, for example, would certainly be miffed if it cannot set up shop in Lucknow to sell the mangoes grown in its surrounds.

It is all fine to say that State governments are under no compulsion to allow FDI in retail in their own cities and towns, but the truth is investors view India as a nation and baulk at suggestions at fragmentation, in their enlightened self-interest.

Inverting natural sequence

The latitude given to foreign retailers to invest at least 50 per cent of what they have brought in by way of FDI into the country in back-end infrastructure, within three years of induction of the FDI, is a trifle baffling.

A manufacturing company first puts up its factory and then commences production and sale. And this involves a gestation period of varying lengths, depending upon the industry it is in and the size of the proposed operations.

Why then reverse this natural order in favour of foreign retailers? Why not mandate them to first show their earnestness by investing in back-end operations? The counter to this argument could be this would expose them to the phase nobody likes — gestation period. But gestation period is inevitable for any manufacturing, processing or infrastructure industry, and foreign retail chains should be no exception.

Apart from being in the logical sequence as well as proof of earnestness, starting with back-end infrastructure would also avoid the bitterness that would arise out of penalising an investor for not keeping his promise.

One should not let an investor, especially of foreign vintage and pedigree, off the hook.

The defence offset contracts provide a stark example of the dangers of such indulgence to foreigners. Orders of the size of Rs 300 crore and above are subject to offset clause in terms of which the foreign defence equipments supplier has to source at least 30 per cent of his exports from India.

This was intended to strengthen our domestic capabilities, but the indulgence shown to foreign armaments and other suppliers has degenerated to such an extent that today the Indian government would be happy if they supply interiors for civilian aircraft and to other less demanding ventures, so long as they plough back 30 per cent of the exports into India.

Parking and connectivity

The government expects retail chains of foreign pedigree to take care of connectivity and parking, twin problems arising out of rapid and relentless urbanisation.

This indeed is a tall order, one that could act as a dampener. It is not as if they are undesirable, but would it be possible for Wal-Mart to ensure connectivity, when that is not in its hands? To be sure, it can be expected to buy a large tract of land to accommodate parking so that the visitors to its establishment do not make a traffic nuisance.

But connectivity is a different kettle of fish.

(The author is a New Delhi-based chartered accountant)

Published on September 20, 2012

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