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LATEST NEWS UPDATES | FDI if retailers procure 30% stuff from small industry by Surajeet Das Gupta & Nayanima Basu

FDI if retailers procure 30% stuff from small industry by Surajeet Das Gupta & Nayanima Basu

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published Published on Nov 19, 2011   modified Modified on Nov 19, 2011

Indian suppliers must be units with investment up to Rs 1.25 cr, says draft before cabinet.

Multinational retailers such as Walmart, Tesco and Carrefour looking to open stores in the country may have to source almost a third of their merchandise from small Indian manufacturers as the government tries to make the opening of multi-brand retail to foreign players more politically palatable.

The draft cabinet note for permitting 51 per cent foreign direct investment (FDI) in multi-brand retailing, which may go for cabinet approval as early as tonight, includes a new clause under which at least 30 per cent of the procurement of manufactured and processed products has to be from ‘small industries’. Even single-brand retailing, where FDI is proposed to go up from the current 51 per cent to 100 per cent, will also be subject to the same sourcing rules. The note also clearly defines the FDI investment floor, approval dynamics, geographical restrictions and the riders and conditionalities thereof.

For the purpose of FDI in multi-brand retail, the note defines small industries as units which have a total plant and machinery investment not exceeding $250,000, approximately Rs 1.25 crore. This investment refers to the value at the time of installation, without providing for depreciation. However, if at any point, this valuation is exceeded, the unit will not qualify as a ‘small industry’ for the purpose of the policy. However, self-certification for compliance of this clause will be permitted and the government would undertake cross-checking if it wants to.

The draft cabinet note on FDI in multi- and single-brand retailing has been prepared by the Department of Industrial Policy and Promotion or DIPP after extensive consultations with various ministries. “We are sending the cabinet note on both FDI in single-brand and multi-brand retail by late tonight. All major ministries have given their recommendations on the draft note. Now, it is up to the cabinet to take a call,” a senior DIPP official told Business Standard. Currently, FDI is not allowed in multi-brand retail, though 100 per cent foreign investment is permitted in the cash-and-carry wholesale business and 51 per cent in single-brand retailing.

The new clause on sourcing from small industries was not part of the recommendations to allow FDI in multi-brand retailing cleared by the committee of secretaries (CoS) in July. The CoS recommendation did not include it because of concerns raised by the finance ministry’s department of economic affairs, which felt it could lead to harassment of small industries by government inspectors. Back then, even the DIPP went along with the view that including the mandatory sourcing condition would not be compliant with India’s commitment under the World Trade Organisation’s agreement on trade-related investment measures.

The sourcing clause, however, was reinserted in the current draft after concerns were raised by the ministries of agriculture, micro, small and medium enterprises, and the department of information & technology. They had concerns over the interests of farmers, the industries of food processing, electronics and textiles, and small and medium enterprises. In meetings to resolve these concerns, the ministry of agriculture suggested a provision be included for 60 per cent sourcing from ‘low-income resources and poor farmers’.

The IT department wanted a clause for 30 per cent domestic sourcing and similar concerns were raised by the textiles and food processing ministries.

Subsequently, a consensus on the exact contours of the draft note was arrived at, and it was decided by DIPP an objective criterion for what constituted a ‘small industry’ would be defined so as not to violate the country’s WTO commitments. Though the agriculture ministry was in favour of inserting a condition these retailers sourced fresh produce like vegetables and fruits only from ‘poor local farmers’, the consensus view was it was unlikely big foreign retailers would go for large-scale imports for cost reasons. Therefore, it was felt there was no need to spell such a conditionality upfront in the policy draft.

The draft, however, more or less endorses most of the other conditions in the CoS recommendations such as allowing 51 per cent FDI in multi-brand retailing only with government approval, with the minimum amount to be brought by the foreign investor at $100 million, and at least 50 per cent of the total FDI to be invested in ‘back-end infrastructure’.

In order to remove any anomaly the draft clearly defines what constitutes ‘back-end’. It includes investment made towards processing, manufacturing, distribution, design improvement, quality control and packaging, amongst others. However, the cost of land and rentals are excluded for this purpose. The calibrated approach for FDI is reflected in the clause that FDI will be allowed only in cities with a population of more than one million as per the 2011 census and may also cover an area 10 kms around the municipal limits of such cities. There are 51 cities with a population of more than one million, based on the 2011 census, and that provides foreign retailers a substantial scope for expansion. Another rider proposed in the CoS deliberations — reservation of a minimum percentage of jobs for the rural youth — has also not been included in the note.

While it has not added any clause that permission from state governments will be required (again proposed in the COS deliberations) the draft note makes it clear retail locations will be restricted to conforming areas as per the master or zonal plans of the concerned cities and a provision has to be made for requisite facilities such as transport connectivity and parking.

The government in the draft has also inserted some key conditions for allowing 100 per cent FDI in single-brand retail. So only products sold under the same brand name internationally will be allowed. Product retailing would cover only those products that are branded during manufacturing and the foreign investor should be the owner of the brand. The government decided to hike FDI in single-brand retail after it was clear the current policy had not been very attractive. From February 2006, when the government allowed 51 per cent FDI in single-brand retail, to August 2011 FDI proposals through the route worth $137 million were cleared. But, actual inflows of only $44.55 million have come, accounting for only 0.03 per cent of total FDI inflows.

WHAT THE DRAFT SAYS

ON FDI IN MULTI-BRAND RETAIL

* Government permission for up to 51 per cent
* Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded
* The minimum amount fixed for a foreign investor is $100 million
* At least 50 per cent of the total FDI must be invested in ‘back-end infrastructure’
* At least 30 per cent of the  procurement of manufactured and processed products should be sourced from ‘small industry’
* Compliance through self-certification. Investors need to keep all records
* Retail sale locations can be set in cities with more than one million population, based on the 2011 census
* The government will have the first right to procure agricultural produce

ON FDI IN SINGLE-BRAND RETAIL

* Permission of up to 100 per cent FDI from 51 per cent at present
* Products to be sold should be of single brand only
* Products should be sold under the same brand name internationally
* Product retailing would cover only those brands which are branded during manufacturing
* The foreign investor should be an owner of the brand
* 30 per cent sourcing from ‘small industries’ would be mandatory

The Business Standard, 19 November, 2011, http://www.business-standard.com/india/news/fdi-if-retailers-procure-30-stuffsmall-industry/455992/

Tagged with: FDI



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