FDI: What's All the Fuss About?

(Published in The New Indian Express, School Edition, dated 30 November, 2011, retrieved from http://expressbuzz.com/school/fdi-what%E2%80%99s-all-the-fuss-about/338407.html)


NOTE: This contains no opinion. It's a summary of the FDI regulation and what it means, and is probably more useful than it's interesting.

On Thursday, India’s Cabinet approved the long-proposed reform allowing 51 percent Foreign Direct Investment (FDI) in its retail sector. This means international brands can invest in India’s $450 billion retail market.

While this would draw in much-needed foreign capital and ease supply bottlenecks, and could come in handy in checking inflation, it is also a blow for small traders and family-owned businesses. India is one of the last large economies where such businesses haven’t been wiped out by supermarkets.

The government has announced it will allow 51 percent FDI in multi-brand retail – supermarkets – and raise FDI from 51 to 100 percent in single-brand retail. This means brands like Starbucks, Zara, Gucci and Costa Coffee can have full ownership of their businesses in India.

Though the new rules outline local sourcing requirements, and minimum investment levels to protect jobs, and Union Minister for Commerce and Industry, Anand Sharma, has emphasised that FDI will increase job opportunities, the move has caused furore in Parliament. It has united the Left and the BJP, and even raised objections from Congress allies DMK and Trinamool Congress. Tamil Nadu Chief Minister Jayalalithaa has slammed the move.

What does 51 percent FDI mean?

FDI refers to an investment abroad, usually where the foreign corporation that is providing capital controls the company it is investing in.

Until now, India allowed 51 percent FDI only in single-brand retail and 100 percent for wholesale operations. The first term that the UPA was in power, a Bill extending FDI to multi-brand retail was not passed because the Left, which supported the government from outside, was against it.

Now, with multi-brand FDI being allowed, global giants like Wal-Mart, Tesco, and Carrefour can open mega stores in your city.

This move has been welcomed by the corporate industry in India, which has had to backtrack expansion plans after protests earlier. For example, in 2007, Reliance Industries had planned to open Western-style supermarkets in Uttar Pradesh, but small traders and political parties put paid to that ambition.

The government’s policy change comes with certain riders:

• Minimum investment of $100 million by the foreign investor.
• 50 per cent of the total FDI to be invested in “back-end infrastructure”, i.e., processing, manufacturing, distribution, design improvement, quality control, warehouses and packaging.
• 30 per cent of the products to be procured from small scale industries, i.e., units that have a total investment not exceeding $250,000 at the time of installation.
• Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, should be unbranded.
•  Retail chains will be allowed only in cities with a population of more than 10 lakh (1 million) as per the 2011 census – there are 51 in total.
•  The investor must have approval from the Foreign Investment Promotion Board (FIPB).

Why is There So Much Opposition to the FDI?  

The retail sector is the largest source of employment after agriculture in India. Foreign brands with deep pockets could put small traders out of business, and may also have an impact on the manufacturing and service sectors.

However, this is not a given – it means smaller retailers, who buy from wholesalers and sell at a good profit, will have to dock down their prices to stay in competition. An enterprising retailer, who offers home delivery, stays open at odd hours, or offers any other benefit that a customer will not get from a supermarket, will likely stay in business.

Another, more worrying, rider has to do with the sourcing requirements. While 30 percent has to be sourced from Micro and Small Enterprises (MSEs), it does not state that these must be MSEs from India.  They can be from anywhere in the world, and experts are worried that this may be more useful to China than India. India already has a trade deficit of $20 billion with China, and Chinese goods are predominant in the Indian markets.

The government has defended the clause, saying it should not violate India’s obligations to the WTO (World Trade Organisation).

Who is Against FDI?

The Opposition BJP has said the services sector accounts for 58 percent of the country’s GDP, and the approval for 51 percent FDI could have an “adverse impact” on the growing domestic retail sector, and also affect consumer choices. Uma Bharti, who was recently re-inducted into the BJP camp, has threatened to burn Wal-Mart stores, once they crop up.

Jayalalithaa has said Tamil Nadu won’t allow multi-brand global players to set up supermarkets in the state. On Sunday, she accused the Centre of “overweening arrogance”, and fumed that the state governments had not been consulted. She said it would not bring down inflation, and would only hit the domestic manufacturing and service sectors, in addition to endangering the livelihood of small traders.

Uttar Pradesh Chief Minister Mayawati said the move had been made to help “Rahul Gandhi’s foreign friends” and denounced it.

The Parliament was adjourned both on Monday and Tuesday, as members of opposition parties demanded a rollback of the decision on FDI.

An all-party meet, presided over by Pranab Mukherjee, was held on Tuesday morning. The government claimed it was not about the FDI, but all issues that were keeping the Parliament from running. However, that failed to break the deadlock, as the government asked for more time to think and could not give the other parties any assurance.

STATES AGAINST FDI	STATES IN FAVOUR OF FDI
Tamil Nadu (AIADMK)	Rajasthan (Congress)
Uttar Pradesh (BSP)	Maharashtra (Congress)
Madhya Pradesh (BJP)	Andhra Pradesh (Congress)
Gujarat (BJP)	Delhi (Congress)
Karnataka (BJP)	Punjab (SAD)
Bihar (JD-U)	Haryana (Congress)
Jharkhand (BJP)
Chhattisgarh (BJP)
West Bengal (TMC)
Orissa (BJD)
Himachal Pradesh (BJP)

WHAT MULTI-BRAND FDI MEANS FOR YOU

You buy products at MRP rates from local stores; but at retail chain stores, you will get them at a discounted rate.

You won't have to ask your NRI aunts and uncles to buy you those chocolates that are so overpriced here!

It will encourage healthy competition between chains, which will mean you'll have a bigger and better range of products to choose from, and you won’t have to settle for goods that are nearing the expiry date!