ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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What Can Economic Principles Teach Us?

Understanding FDI in Retail

The recent debate on the acceptability of foreign direct investment in the retail sector in India has been mostly political. It is necessary to look into the pros and cons of FDI in retail from a purely economic point of view. This article identifi es the safeguards that should be undertaken before allowing giant multinationals to function in the country.

The recent policy of allowing 51% foreign direct investment (FDI) in multibrand retail has generated political feuds rather than proper economic debates. Politicians seldom speak with ifs and buts; their arguments are rarely burdened with caveats, warnings and qualifications. They take one­dimensional positions and avoid complicated reasoning with a view to be specific and not confuse their audience. It is not at all surprising, therefore, that the political parties which are advocating FDI in retail refuse to accept that there is any dark side to it while those who are opposing the policy see none of its positive aspects. But the proposed policy is primarily an economic one and like many such policies it is likely to affect different groups of people differently. It is, therefore, both necessary and desirable to understand the possible effects of the policy on the overall economy and on the groups and fragments of people lying within it. In short, the economic truth, lying somewhere in between the two extreme positions politicians have taken, needs to be carefully located.

Before we get into such an endeavour, the salient features of the proposed FDI policy in multibrand retail may be collected. The policy, which was cleared by the union cabinet on 24 November 2011, allows up to 51% foreign equity in a retail company, provided the total investment by foreigners in the company is at least $100 million. Of this foreign ­investment, onehalf is to be invested in backend infrastructure including cold chains, refrigeration, transportation, packing, sorting and processing. These investments will be allowed only in ­cities with a population of more than one million. According to the 2011 Census, there are 53 such cities out of a total of 7,935 cities and towns in the country. Finally, the retail company receiving the FDI is required to source at least 30% of its ware from Indian micro and small enterprises which have capital investment of not more than $1 million.

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