AIR spotlight summary on “FDI Reforms”.
Introduction
- Liberalisation of FDI policy on single brand retail and aviation was pending for many years and now has taken place.
FDI in Single Brand Retail
- FDI policy in retail sector has been controversial because it opens the door for foreign investors in an area where there are large number of small kirana shop owners with small resources and limited ability to take on foreign competition. So any government looks at liberalising the retail sector with lot of caution and circumspection. Initially the government allowed foreign investment upto 100% in single brand retail through government approval route. Now it will be an automatic route which means the government is giving up its control. This decision is significant in the context of very slow pace of foreign investment flows in the retail sector.
- India has seen a remarkable rise in FDI in the last few years. In spite of that the retail sector acquired a very small share in total FDI investments. In 2017 the FDI in retail sector was as low as 5% of the total FDI flows to the country. In 2016 it was 9%. The cumulative figure from 2000 until now is around 4%. In other countries the retail sector accounts for large chunk of FDI inflows. But now one can hope that with the liberalisation, single brand retail will see some pickup in FDI flows. In multi brand retail the government policy is still to be fine-tuned.
- Once the FDI proposal is cleared in the automatic route, the foreign investor negotiates with the local government for various clearances. In ease of doing business, India’s ranking has improved from 130 to 100 and one of those categories where India has made remarkable improvement is getting clearances for setting up businesses. It is believed that once the Centre gives automatic clearances, the state will also fall in line.
- Foreign investor will always look at opportunities and so the competitive federalism will come into the picture. A state that can provide easier clearances, better infrastructure and attractive domestic market will have an advantage in attracting the foreign investor.
Impact
- These investments create huge job opportunities for retail outlets, the value chain for the upstream and downstream sectors. The manufacturing sector also benefits as large number of items which are sold are sourced from the domestic manufacturers as there is domestic sourcing requirement of 30%. It also creates opportunities for exports.
- Single brand retail will give lot of confidence among traders and also kirana houses who are right now apprehensive. Studies have shown that the advent of single brand retail and even the multi brand retail helps create an ecosystem in which both the kirana stores and the multi brand retail and single brand retail stores can prosper because India is a young market, a growing market and there is large number of young population which is willing to spend money in items of consumption.
- This is a brave policy by the government, as there was lot of push and pull by the kirana stores union who see this as loss of opportunity. But is actually an enabling situation because with every single brand retail investor from a developed country will improve the basic infrastructure, the cold chains get improved and the supply chains become more efficient.
- The single brand retail will put a healthy competition in e-commerce because what is available through e-commerce will also be available in single brand retail. The same retail stores can sell these goods and provide services through e-commerce portal. The cost efficiencies will improve and this is a win-win situation for the retail sector and the economy.
FDI in Aviation Sector
- The policy in the aviation sector is that any foreign airline can invest upto 49%. Earlier the response was very lukewarm and the percentage of total FDI flows is less than 0.5%. While the Indian airlines have performed very well in creating a competitive market place in the aviation sector. The government has put in place the privatisation plan for Air India where a foreign airline can invest upto 49% which is a significant step.
