Retail FDI note raises more questions than it answers

Vivek Kaul
The press note for allowing foreign direct investment (FDI) of up to 51% in multi-brand foreign retailing throws up several interesting points as well as questions.
One of the major points of the press note is that retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 census. There are 45 cities in India that meet this requirement.
Currently eight states, the national capital territory of Delhi and the union territories of Daman & Diu and Dadra and Nagar Haveli have agreed to allow FDI in multi-brand retailing. All these states are ruled by the Congress party.
But as the data from the 2011 census points out, only 20 of these 45 cities are in states that have currently agreed to FDI in muti-brand foreign retailing or big retail, as it is more popularly referred to as.
Interestingly, the Census of India has two classifications. One is cities having population 1 lakh and above. And another is urban agglomerations/cities having population 1 lakh and above. As per the former India has 45 cities of population which have a population of 10 lakh or more. As per the latter India has 53 cities/urban agglomerations which have a population of 10 lakh or more.
For the sake of this analysis the former has been used because the press note uses the word “cities” very clearly and not cities/urban agglomerations.  But even if one works with the assumption of 53 cities, the analysis that follows doesn’t change much. Nevertheless, the government needs to clear this confusion on which version of the census applies here.
The state of Maharashtra leads the pack with 10 cities out of the 20 cities which qualify for big retail. These are Aurangabad, Kalyan-Dombivilli, Navi Mumbai, Mumbai, Pimpri-Chinchwad, Pune Nagpur, Nashik, Thane and Vasai-Virar.  Hyderabad, Vijaywada and Vishakapatnam are the three cities that meet the criteria in Andhra Pradesh. Kota, Jaipur and Jodhpur are the three cities in Rajasthan. Srinagar in Jammu and Kashmir, Faridabad in Haryana (and not the fancied Gurgaon which has a population of 876,824 as per the 2011 census), New Delhi and Chandigarh are the four other cities that make the list. Chandigarh is the capital of Haryana, which has agreed to allow FDI in big retail. But it is also the capital of the state of Punjab, which hasn’t.
What is interesting is that 50% of the cities eligible for big retail are in one state i.e. Maharashtra. It also means that there are no cities in Assam, Manipur and the Union Territories of Daman & Diu and Dadra and Nagar Haveli which meet the criteria of population of more than 10 lakh.
To get around this problem the note allows companies to be set up retail sales outlets in the cities of their choice, preferably the largest city, in states/ union territories not having cities with population of more than 10 lakh as per 2011 Census.
But the most interesting part of the note is that most of the policies elucidated in the note are only enabling in nature. Hence, governments in states and union territories are free to make their own policies. This means that it is very well possible that states might allow big retail to set shop in places with a population of less than 10 lakh. What stops the state of Haryana from allowing big retail presence in the city of Gurgaon?  Or Maharashtra allowing big retail in Mira Road-Bhayander which has a population of 8,14,655 as per the 2011 census. The same can be said about Secunderabad, which is Hyderabad’s twin city, and Jammu which is the second largest city in the state of Jammu and Kashmir. Another point in the note is that at least 50% of total FDI brought in shall be invested in ‘backend infrastructure’ within three years of the first tranche of FDI. The note doesn’t specify whether this investment is to be limited in states that have allowed big retail. So the conclusion is that this investment can be made all across India. But here is where practical problems might crop up.
A company like Wal-Mart to may set up backend infrastructure in a state like Himachal Pradesh to source apples. But as we know Himachal Pradesh isn’t on the list of states that have allowed FDI in big retail. So we will end up with a situation where big retail is present in a state at the backend but at the same time it’s not allowed to set up a front end retail store. That would not be an ideal situation.
Another major problem can crop up because of the decision being currently left to the states. The states that have agreed to big retail are all Congress ruled (except Kerala which is ruled by the Congress led United Democratic Front but hasn’t said yes to big retail). Now what happens if the Congress party loses the next elections in these states? Can the party or front which comes to power reverse the earlier decision?
The note also points out that the government will have the first right to procurement of agricultural products. What is implied by this? At the same time the note points out that at least 30% of the value of procurement of manufactured/processed products purchased, shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $1 million.  This will be a huge problem for big retail companies which play on economies of scale.
But at the same time the note is silent on international procurement of goods and products by these companies. This means that companies which invest in big retail can source their products internationally. Hence, a Wal-Mart can source products for the Indian market from China. “More than 70% of the goods sold in Wal-Mart stores around the world are made in China,” point out Garry Gereffi and Ryan Ong in a case study titled Wal-Mart in China which was published in the Harvard Asia Pacific Review. Sourcing from China has been the backbone of Wal-Mart’s everyday low pricing strategy.
The state governments that allow FDI in big retail can change any of the policies mentioned above and frame their own policies because these policies are only enabling in nature. The only part that they cannot change is retail trading by means of e-commerce.
(The article originally appeared in the Daily News and Analysis on September 24, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])