FDI in food retail: To draw in investors, do away with restrictions

Every year, farmers are forced to sell their produce, especially perishable items such as fruits and vegetables, at throwaway prices, causing loss of income and even suicides. A major bottleneck that forces them to do so is the lack of infrastructure for handling and storage of these items, which results in the loss of output worth Rs 1 lakh crore annually, a fact that Prime Minister Narendra Modi alluded to while addressing a conclave of young CEOs].

The problem has been festering for decades despite both the Union government and states recognising the dire need for setting up the infrastructure and umpteen committees making recommendations in this regard. Even domestic private companies have hardly taken any initiative despite being allowed entry into organised retail, which gives them ample reason to establish backward linkages for sourcing their requirements. Foreign direct investment (FDI) could help in filling the void, but the policy environment is far from conducive.

Prior to 2012, FDI in multi-brand retail (including food retail, which accounts for half the sector) was prohibited. In 2012, the then UPA government allowed FDI up to 51% in multi-brand retail, subject to a plethora of conditions. These included 30% local sourcing, a minimum investment of $100 million, of which at least half had to be in back-end infrastructure, and prior approval of the state where the business was to be set up.

Taken together, these conditions made it a policy not of allowing FDI in multi-brand retail but of effectively blocking it. First, restricting shareholding of foreign investor to 51% meant that he would need to find a domestic partner to chip in with the balance 49%. The condition stipulating a minimum investment of $100 million, with half of it in back-end infrastructure, was a deterrent to the latter’s participation. Second, the 30% local sourcing requirement was a major irritant to foreign investors. Third, having to separately obtain the approval of the state concerned added salt to the injury.

The proof of the pudding is in the eating. In the five years since this policy was approved, except Tesco which had a joint venture with Tata’s Trent, there has not been any FDI in multi-brand retail. In fact, there were some exits. The Bharti-Walmart venture split in 2013, and Carrefour exited the following year.

Meanwhile, in 2015, the Modi government allowed 100% FDI in ‘marketplace’ retail – an IT platform that provides support services, namely warehousing, logistics, order fulfilment, payment collection, etc., to sellers and buyers. But even this was subject to a cap – any single vendor on the platform could account for a maximum of 25% of the total sales on it. In the ‘inventory-based’ model of e-commerce, however, where the company also owns inventory of goods and services, FDI is prohibited.

The above stipulation amounted to a backdoor entry of FDI in multi-brand retail in the online segment. For, the ground reality is that online companies owning inventory do everything that a seller does to execute the transaction, and yet manage to get 100% FDI. They do so by camouflaging their activities under the ‘marketplace’ model through clever documentation — all they need to do is show that stock is held by someone else.

This was a sore point with multi-brand retail players in the offline or physical segment who felt discriminated vis-à-vis online players. The former have even petitioned the court challenging the extant policy environment whereby they are virtually denied foreign investment while the latter has unfettered access to FDI.

One step forward

In Budget 2016-17, Finance Minister Arun Jaitely announced 100% FDI in food retail, subject to the retailer selling only food items procured from farmers in India and processed locally. After a wait of more than a year, the government has now approved an application of Amazon.in for 100% FDI in a food retail chain – both online sales (e-commerce) and offline (brick-and-mortar).

This may have enthused Amazon for now but the riders continue to haunt it. The requirement to sell ‘locally’ produced food forecloses the import option. A further condition that the foreign retailer cannot sell any item other than food takes away the flexibility to improve margins which in the food business per se are limited. Yet another obligation to invest in back-end infrastructure in agriculture -– as desired by the food processing ministry — makes matters worse.

The government is said to be considering allowing foreign players to sell non-food items, say in the personal care segment (in addition to food), up to a certain percentage of the investment they make in agri-infrastructure. Assuming the latter to be 20% of total investment and the company getting to sell 25% of this as non-food quota, it will get a leeway of only 5%. This will hardly add to its capability to improve overall profitability of operations.

Assuming that despite all these riders MNCs do come in, who will do the monitoring to ensure compliance? In a scenario where the bureaucracy is riddled with corruption, where will the government find honest officials to do the job? And, in any case, will this not amount to a return to ‘inspector raj’? What happens to Modi’s vision of a policy-driven state in which there is no room for discretion?

Modi’s intent to allow 100% FDI in food retail is laudable. It is also good to see the policy being applied uniformly to both online and offline segments. But for it to be effective, the government should lift all restrictions, namely local sourcing, investment limits, etc. It should be abundantly clear to our policymakers that investors cannot be coerced into taking a straitjacket. The former should only focus on putting in place a congenial environment and leave the rest to the latter.

Once such an environment is in place, MNCs will come in droves and also invest substantially in handling, storage and transportation as they see opportunities for growth. Giving them a free hand should be seen in the larger perspective of eliminating a Rs 1 lakh crore loss annually due to wastage of produce alone and giving a better deal to millions of farmers towards achieving the avowed goal of doubling their income.

Team Modi also needs to think through allowing 100% FDI in multi-brand retail in general and not limit it only to food.

http://www.deccanherald.com/content/631624/fdi-food-retail-draw-investors.html

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