Allowing FDI not enough

Allowing FDI not enough; new government needs to deal with operational inefficiencies

G Seetharaman, ET Bureau Apr 13, 2014, 08.01AM IST

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Few reforms impacting the corporate sector in India have been extrapolated as much in recent times to discern the government's intent to drive growth as foreign direct investment (FDI) in multi-brand retail.

Ever a political hot potato, it has also provided for much grandstanding among political parties.

The Congress-led United Progressive Alliance (UPA) government in late 2012 allowed foreign retailers like Walmart, Tesco and Carrefour to own up to 51% in multi-brand outlets in India, which was subsequently okayed by parliament.

But the move came with riders like a minimum FDI of $100 million, mandatory sourcing of 30% of items from local small and medium companies, and 50% of the foreign retailer's investment in backend infrastructure. The Centre also mandated that the retailer had to seek the state government's approval.

Touch and Go

While Congress-ruled states like Andhra Pradesh, Himachal Pradesh and Maharashtra toed the Centre's line, the reform attracted vociferous opposition from the likes of West Bengal chief minister Mamata Banerjee and Uttar Pradesh chief minister Akhilesh Yadav, on the grounds that it is not in the interest of farmers and mom-and-pop stores. The retail industry accounts for over a fifth of India's gross domestic project and for under a tenth of its employment.

Formerly Congress-ruled states like Delhi, which the Aam Aadmi Party ruled for 49 days, and Rajasthan, where the Bharatiya Janata Party is in power, retracted their approvals after the Congress was defeated in state elections late last year. While BJP's prime ministerial candidate and Gujarat chief minister Narendra Modi appeared to back the proposal recently — in February at an event in Delhi he urged traders to face up to global challenges — BJP has been opposed to it, with its president Rajnath Singh saying the party would reverse the UPA's decision once in power.

So it did not really come as a shock to many supporters of the reform when BJP in its election manifesto said it is open to FDI in all sectors but multi-brand retail. "BJP is committed to protecting the interest of small and medium retailers, SMEs and those employed by them," says the manifesto. So far, reportedly only Tesco, the UK's largest retailer, has shown interest, with a plan to pick up 50% in Trent Hypermarket, a Tata group company, and an initial investment of $110 million.

A day after BJP released its manifesto Walmart said it would continue to focus on and expand its cash-and-carry operation. While several key infrastructure segments like highways, ports, airports and power already have 100% FDI, demands for a hike in FDI limits from 26% to 49% in insurance, pension and defence are still pending. FDI is allowed through the automatic or ap-proval route.

The government in July 2012 relaxed FDI limits in 12 sectors, including telecom and single-brand retail, both of which have 100% FDI. Saurabh Mukherjea, chief executive, institutional equities, Ambit Capital, feels FDI is not the burning issue it was a decade ago. "It is not central to the debate on economic reforms anymore. Moreover, FDI inflows have been steady in recent years," he says.

  Sectoral Hurdles

India attracted inflows of $28 billion in 2013, a growth of 17% over 2012, according to the United Nations Conference on Trade and Development. The figure is the second lowest, after South Africa's, among the BRICS (Brazil, Russia, India, China, South Africa) economies (see FDI Inflows...), though South Africa registered the highest growth among them, of 126% on a low base, to $10 billion in 2013.

Rashesh Shah, chairman and CEO, Edelweiss group, admits that raising FDI limits in insurance and defence will have a big positive psychological impact on investors. "But it is only the first of measures that should be taken to encourage investors. After FDI, we have to ensure all the approvals for a project or a venture are given quickly," he adds. According to the Reserve Bank of India (RBI), half of the infrastructure projects worth Rs 150 crore or more each and awarded by the central government are stuck due to regulatory hurdles and sector-specific problems.

Some RBI statistics in an August 2013 report are startling. Less than a third of 576 special economic zones approved so far are operational; just over a fifth of the targeted 50,621 km of road projects have been awarded in the 2008-13 period; just four of the planned 16 ultra mega power projects (of 4,000 MW and above) have been awarded; and under the New Exploration and Licensing Policy for exploration of crude oil and natural gas, under half of the 251 blocks allotted have reported discoveries but only six are operational. Foreign investors can pick up 100% in these sectors, save some exceptions, so FDI limits are clearly not the problem here.