Wednesday, November 30, 2011

FDI: What’s all the fuss about?

Last Thursday, India’s Cabinet approved the long-proposed reform allowing 51 per cent foreign direct investment (FDI) in its retail sector. This means international brands can invest in India’s $450 billion retail market.
While this will draw in much-needed foreign capital and ease supply bottlenecks, and could come in handy in checking inflation, it is also considered a blow for small traders and family-owned businesses. India is one of the last of the large economies where such businesses haven’t yet been wiped out by supermarkets.
The government has announced it will allow 51 per cent FDI in multi-brand retail — supermarkets — and raise FDI from 51 to 100 per cent 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 a 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 is 51 per cent FDI?
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 per cent FDI only in single-brand retail and 100 per cent 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 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”, ie processing, manufacturing, distribution, design improvement, quality control, warehouses and packaging.
30 per cent of the products to be procured from small scale industries, ie 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 per cent has to be sourced from Micro and Small Enterprises (MSEs), the government 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 dominate 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?
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