Redrawing FDI schematics

In her Budget speech, Finance Minister Nirmala Sitharman was assertive for easing FDI policy for certain sectors, like in Single brand retail, aviation, media and contract manufacturing. FDI proved a key success story for Make in India, amidst dubious opinion on its success. During 2014-15 to 2018-19, FDI spurred by 46 per cent – from US$ 30 Billion to US$ 44 Billion – the highest growth achieved in any five year period ever.

One reason for the high growth in FDI was the laggard FDI flow in China. During the four-year period between 2015 and 2018, China witnessed wafer-thin growth in FDI flow. It grew by 0.2 per cent annually. With the Chinese currency losing grip on pegging to US Dollar and high cost for tackling environmental abatement, China lost the paradise of a low-cost manufacturing hub. Eventually, they damaged China's potential for exports to the world.

Given the situation, MNCs shifted their production network to India and ASEAN low cost manufacturing nations. India was leveraged as the new dynamic destination for foreign investment. For example, Singapore emerged as the biggest foreign investing nation in India in 2018-19, outsmarting the traditional big investors like Mauritius, Japan, UK, Netherland and the US.

Realising the significance of FDI to give a boost to Make in India, Sitharaman added more doses of liberalisations in FDI policies. One of them was the long pending easing of FDI policy in Single brand retail while others were opening the coal sector for foreign investment and giving recognition to contract manufacturing.

So far, India's FDI policies in almost all sectors were competitive to ASEAN countries, excepting in retail trade. Indian policymakers were barred to open retail sector more competitively because of political compulsion.

Retail trading is an attractive sector for foreign investment in India because of its demographic dividend and high growth in GDP. It contributes 20 per cent to a three trillion US Dollar economy. Retail sector provides a vast market size of US$ 672 billion in 2017. It is expected to reach US$ 1,200 Billion by 2021. It employs 8 per cent of employment.

But, the apathy of the industry is that only 20 per cent of retail trade in India is organised. The paradox of the Indian retail sector investment is that despite the big windfall, domestic investors loathed investing in this sector. They were swayed by huge infrastructure costs, such as warehousing and logistics, in a country which is widely diversified in physical characteristics and culture. This left ample opportunities for foreign investors to invest in the retail sector.

India opened the retail sector to foreign investors but with a snag. The previous government permitted FDI in multi-brand retail, but NDA put a break on it due to political compulsion. A large number of BJP members are reliant on mom-and-pop shops. Eventually, FDI in Single brand retail trade was given a step-motherly treatment. 100 per cent FDI was permitted but with an override. It invoked 30 per cent domestic procurement for sale within the country.

This unleashed a major setback to the foreign investors for trading in the country. Despite the high potential for FDI in retail trade, foreign investors were reluctant to invest. A minuscule of FDI flowed in retail trade. During April 2000-March 2019, only US$ 1.66 Billion of FDI flowed in the retail sector. This accounted for only 0.5 per cent of total FDI flow in the country.

Now, the government has decided to do away with the normal practice for counting the share of 'domestic procurement' to the extent of 30 per cent. Instead of counting share of domestic product sales within the country, the export of domestic products will be treated as 'domestic procurement'. This will give a fresh life to foreign investors in Single brand retail.

Investment by Apple Inc under Single brand retail is a case in point. After China got dethroned as a paradise for low-cost production, Apple Inc looked towards India for its iPhone market. India is the largest market for smartphones in the world. To avail benefit of low-cost production, Apple Inc contemplated getting its iPhone manufactured in India through contract manufacturing by Foxcom of Taiwan. This paved the way for a mega-investment by Foxcom, amounting to US$ 5 Billion.

But, the hinge remains with domestic procurement. Even though a three-year relaxation was given where the 'state-of-art' and 'cutting-age' technology products are not possible within the country, it was too short a period to produce critical components and devices for iPad and iPhone.

The easing of FDI in Single brand retail and opening coal mining are paltry to attract FDI when it is compared with China which embarked on mega reforms in FDI. India's liberalisation in FDI targets a specific sector whereas Chinese's new Foreign Investment Law (FIL) is an overhauling of the old policy. It will be effective from January 1, 2020. It will edge out India's partly relaxations to attract FDI.

China's new FIL endeavoured to plug the major criticisms of its FDI policy. It mandated national treatment to foreign investors (barring negative list), committed a ban on mandatory transfer of technology, promised better protection to intellectual property rights and ensured equal rights to government procurement.

National treatment to foreign investors under the new Chinese FIL will edge out India's liberalisation in Single brand retail. National treatment will be offered in issuing business licenses for retail trade. Hitherto, a foreign investor in the retail sector must go through stricter licensing procedures. First, they have to obtain a license from the Central Government, Ministry of Commerce, China (MOFCOM) and then registration approval from State Administration of Industry and Commerce (SAIC). Domestic investors can obtain a license directly from SAIC. After the new FIL, foreign investors can obtain license directly from SAIC at par with domestic investors.

The new FIL will open a new door for foreign investors to produce in China and export to vast infrastructure development projects under BRI initiative (Belt and Road) through the new law for equal rights for government procurement. Currently, over 60 per cent of Chinese funded BRI contracts go to Chinese firms.

Given the situation, India should reinvent its FDI in multi-brand retail, alongside its rationalisation in Single brand retail. IPA

(The views expressed are strictly personal)