dna edit: Stop concessions

When foreign direct investment (FDI) in multi-brand retail was approved in late-2012, the government had imposed several norms to boost domestic industry and offset prospective job losses suffered by the existing wholesale-retail sector. One norm mandated sourcing 30 per cent of purchases from “small” industries whose total investment in plant and machinery did not exceed $1 million. Another necessitated a minimum investment of US$100 million, of which 50 per cent would be ploughed into back-end operations excluding investment in land, rent, and front-end stores. Months later, unable to attract any FDI, the government is considering the dilution of these norms and sweetening the deal further in desperation.

The $1 million bar on “small” industries is proposed to be raised to $2 million and the 50 per cent investment in back-end operations might apply only to the first $100 million tranche of FDI brought in. Further, the cap restricting retail outlets to cities with more than 10 lakh population could go. Retail giants, nervous over political opposition but in a tearing hurry to turn profitable, are angling for more concessions. They want the 30 per cent sourcing to be “preferable” and not “mandatory” and insist on continuing purchase from firms which outgrow the “small” tag.

The ministry of micro, small and medium enterprises, tasked with protecting and developing India’s small industry, has objected to most of this. The Parliamentary Standing Committee on Industry has demanded that the 30 per cent sourcing be done item-wise instead of total annual procurement. This would have ensured balanced development. It is in India’s interest to strengthen domestic small-scale manufacturing. A liberalised trade policy already facilitates cheap imports from China and retail giants like Walmart will aggravate this trade deficit unless made to source locally. The 50 per cent investment in back-end operations, now truncated to just the first $100 million tranche, will be another lost opportunity to boost infrastructure like cold-chains. Considering the stakes involved, a regulatory body is necessary to ensure retailers stick to their word.

Despite a history of climbdowns when confronted with corporate tantrums, the UPA government must not yield further ground. The Indian growth story will never achieve its job-generating, wealth-spreading potential or trickle-down effect, call it what you may, if FDI gets unwarranted concessions. Opposition parties have consistently opposed FDI in multi-brand retail over marginalisation of wholesalers and small retailers. The parliamentary standing committee has slammed the government for not conducting detailed or reliable studies on job-creation and impact on small retailers and industry before granting approval.

Inviting foreign investors and then penalising or showing them the door is not an acceptable option. Set the best terms up ahead, and then stand firm. Boosting the current account over the short-run, through the FDI-route, is important. But so is ensuring sustained benefits for all sections.