Dangers posed by FDI in retail

| Updated on: Dec 19, 2012

The promised protection for small industries could turn out to be a farce.

The Parliamentary approval to opening up multi-brand retail up to 51 per cent in foreign direct investment (FDI) is no guarantor that things will be fine soon. Investors are not too pleased with the fact that States have still been left with the choice to opt in or out of allowing FDI in multi-brand retail; most States made it clear that they would not let their small traders shut down shop.

Besides, the virtual tumult this issue had evoked in Parliament, prompting ideologically disparate political parties such as BJP and the Left to vote against it, has sent gloomy signals to overseas investors — even with 51 per cent and not 100 per cent in multi-brand retail, they would not have a smooth run across India.

The reservations on allowing FDI in multi-brand retail may not be wholly unfounded.


The Department of Industrial Policy & Promotion (DIPP) Press Note 5 (2012 series) issued on October 20, said that 30 per cent of the value of procurement of manufactured/processed products purchased by multi-brand retail giants, should be sourced from Indian ‘small industries’ with a total investment in plant and machinery not exceeding $1 million.

This valuation refers to the value at the time of installation, without providing for depreciation. Besides, if, at any point of time, this valuation is exceeded, the industry would not qualify as ‘small industry’ for this purpose.

The other stipulation is that the procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured/processed products purchased, beginning April 1, of the year during which the first tranche of FDI is obtained.

Thereafter it would have to be met on an annual basis. The rationale for this clause is that the FDI entry should benefit small-scale industries.

Again, the rider that at least 50 per cent of total FDI brought in should be invested in ‘back-end infrastructure’ within three years of the first tranche of FDI (the minimum amount to be brought in as FDI by the foreign investor would be $100 million) that covers capital expenditure on all activities such as processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure.


A moot point is that the rules provides for self-certification by the company to ensure compliance of the twin conditions, “which could be cross-checked, as and when required”.

The onus is on the purchaser to fulfil the conditions that may be duly ‘certified by statutory auditors’ through self-certification. Big foreign companies with deep pockets would find it facile to manufacture such certification from complaisant auditors to play ball with them, instead of scouring the country to obtain the requisite supply from MSEs. It would not be off the mark to note that policy reservation for small-scale industries (SSIs) which later morphed into MSEs, was set off in 1967.

But over the years and particularly after India’s liberalisation of trade and industrial policies in 1991, 887 items had been de-reserved from time to time.

With the last deletion in 2010, the number of items in the reserved list has been brought down to 20, which cover only food and allied industries, wood and wood products, paper products, other chemicals and chemical products, glass and ceramics, mechanical engineering excluding transport equipment such as steel almirah, rolling shutters, padlocks, stainless steel utensils and domestic utensils-aluminium. This was stated by the Minister for Micro, Small & Medium Enterprises K. H. Muniyappa in Rajya Sabha on December 10.

With the space for MSMEs thus reduced, can they be expected to provide 30 per cent of the requirements of multi-brand retail stores, comprising assorted goods and items? Apart from the 30 per cent mandatory reservations which may be easily circumvented, the rest of the 70 per cent can be imported from cheaper sources such as China and Bangladesh, further harming domestic industry.

Already, the air is rife with troubling tidings that Wal-Mart is being subjected to inquiry under the Foreign Corrupt Practices Act, US, into the allegations of potential violations in certain countries, including India.

Following the uproar in Parliament, the Government has been compelled to set up an inquiry committee under a retired judge.

The Reserve Bank has said that issues related to Bharti Wal-Mart/Cedar Support Services Ltd and Flipkart Online Services Pvt Ltd, respectively, have been referred to the Directorate of Enforcement for further probe. This was stated in the Lok Sabha on December 3 by Minister of Commerce and Industry Anand Sharma.


Unorganised retailing in India encompasses low-cost retailing, for instance, the local kirana shops, owned and operated general stores, pan/beedi shops, convenience stores, hand cart, pavement vendors that one is inured to here. Organised retail chains such as Pantaloon, Shoppers’ Stop, Marks & Spencer, Hyper City, Trent, Reliance Retail, Subhiksha constitute only five per cent of the total retail market.

India’s retail business provides livelihood security to lakhs of self-employed people.

Without providing manufacturing-driven job opportunities to millions, the Government would be fostering social problems of huge dimensions, if it believes FDI in retail would deliver.

Published on March 12, 2018

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