Move to relax retail FDI norms is welcome,but the delay in doing so has been costly
The Department of Industrial Policy and Promotion (DIPP) has circulated a draft cabinet note seeking to ease norms for foreign chains operating multibrand retail in India. Good news,but a bit embarrassing too,since it comes only days after Walmart,the worlds biggest retailer,told DIPP officials that it could not meet the requirement to source at least 30 per cent of manufactured or processed wares from small industries in India. Tesco,Carrefour,Trent and Bharti Retail had also sought rationalisation of norms. And the move was no doubt spurred by the withdrawals of Posco,ArcelorMittal and Berkshire Hathaway,and a foundering currency. While the governments move to ease norms is realistic,why did it hold out till reality held a gun to its head? It cannot have failed to notice that not a single fresh FDI proposal had been filed since September last year,when the norms were issued. And prospective retailers have been negotiating with government since June,pitching for quick and decisive action.
Having said that,the reforms suggested are positive and set aside the biggest stumbling block. Earlier,it was mandatory to source 30 per cent of wares from small industries with plant investment under $1 million. The problem was that if suppliers grew on the strength of the business generated,they would disqualify themselves,turning the supply chain into a shifting,unreal landscape. The ceiling has now been hiked to $2 million and will be applied only at the time of contracting,leaving suppliers free to grow and assuring retailers of a stable supply chain. In addition,retailers can now open shop anywhere they want,irrespective of the population norms in force earlier,and restrictions on back-end infrastructure are to be diluted.
This is a step in the right direction,but only the first step. The Ministry of Micro,Small and Medium Enterprises has reportedly opposed the move. So has Tamil Nadu Chief Minister J. Jayalalithaa. The government will need to handle the politics of the move intelligently. It may not be able to afford another round of the high drama that the FDI issue had generated last year,when it had risked its future to push through the reform. There is a lesson here for future reforms: if you want them to work,set norms in consultation with industry. There is no real reform if norms disable business.