New foreign investment law in China is a big challenge to India

By Subrata Majumder. Dated: 9/12/2019 1:12:08 AM

Sitharaman's FDI policy changes in retail may not mean much

In her Budget speech, Finance Minister Nirmala Sitharman was assertive for easing FDI policy for certain sectors, like in Single brand retail, aviation, media and contract manufacturing. FDI proved a key success story for Make in India, amidst dubious opinion on its success. During 2014-15 to 2018-19, FDI spurred by 46 per cent - from US $30 Billion to US $44 Billion - the highest growth achieved in any five year period ever.
One reason for the high growth in FDI was the laggard FDI flow in China. During four years period between 2015 and 2018, China witnessed wafer-thin growth in FDI flow. It grew by 0.2 percent annually. With Chinese currency loosing grip on pegging to US Dollar and high cost for tackling environmental abatement, China lost the paradise of low cost manufacturing hub. Eventually, they damaged China's potential for exports to the world.
Given the situation, MNCs shifted their production network to India and ASEAN low cost manufacturing nations. India was leveraged as the new dynamic destination for foreign investment. For example, Singapore emerged as the biggest foreign investing nation in India in 2018-19, outsmarting the traditional big investors like Mauritius, Japan, UK, Netherland and USA.
Realizing the significance of FDI to give a boost to Make in India, Finance Minister Sitharaman added more doses of liberalizations in FDI policies. One of them was the long pending easing of FDI policy in Single brand retail and others were opening coal sector for foreign investment and giving recognition to contract manufacturing a part of manufacturing.
So far, India's FDI policies in almost all sectors were competitive to ASEAN countries, excepting in retail trade. Indian policy makers were barred to open retail sector more competitively because of political compulsion.
Retail trading is an attractive sector for foreign investment in India, because of its demographic dividend and high growth in GDP. It contributes 20 per cent to three trillion US Dollar economy. Retail sector provides a vast market size of US$672 billion in 2017. It is expected to reach US $ 1,200 Billion by 2021. It employs 8 per cent of employment.
But, the apathy of the industry is that only 20 per cent of retail trade in India is organized. The paradox of Indian retail sector investment is that despite the big windfall, domestic investors loathed to invest in this sector. They were swayed by huge infrastructure costs, such as warehousing and logistics, in a country which is widely diversified in physical characteristics and culture. This left ample opportunities for foreign investors to invest in retail sector.
India opened the retail sectors to foreign investors, but with a snag. Previous government permitted FDI in multi brand retail, but NDA put a break on it due to political compulsion. A large number of BJP members are reliant on mom-and-pop shops. Eventually, FDI in Single brand retail trade was given a step - motherly treatment. 100 percent FDI was permitted, but with an override. It invoked 30 per cent domestic procurement for sale within the country.
This unleashed a major setback to the foreign investors for trading in the country. Despite high potential for FDI in retail trade, foreign investors were reluctant to invest. A miniscule of FDI flowed in retail trade. During April 2000 - March 2019, only US $ 1.66 Billion of FDI flowed in retail sector. This accounted for only 0.5 per cent of total FDI flow in the country.
Now, the government has decided to do away with the normal practice for counting the share of 'domestic procurement' to the extent of 30 percent. Instead of counting share of domestic product sales within the country, export of domestic products will be treated as 'domestic procurement'. This will give a fresh life to the foreign investors in Single brand retail.
Investment by Apple Incunder Single brand retail is a case in point. After China loosing as paradise for low cost production, Apple Inc looked towards India for its iPhone market. India is the largest market for smart phone in the world. To avail benefit of low cost production, Apple Inc contemplated to get its IPhone manufactured in India through contract manufacturing by Foxcom of Taiwan. This paved the way for a mega investment by Foxcom, amounting to US $ 5 Billion.
But, the hinge remains with domestic procurement. Even though a three year relaxation was given where the 'state-of-art' and 'cutting-age' technology products are not possible within the country, it was too short a period to produce critical components and devices for iPad phone.
The easing of FDI in Single brand retail and opening coal mining are paltry to attract FDI when it is compared with China which embarked on mega reforms in FDI. India's liberalization in FDI targets a specific sector, whereas Chinese new Foreign Investment Law (FIL) is an overhauling of the old policy. It will be effective from January 1, 2020. It will edge out India's partly relaxations to attract FDI.
China's new FIL endeavoured to plug the major criticisms of its FDI policy. It mandated national treatment to foreign investors (barring negative list), committed ban on mandatory transfer of technology, promised better protection to intellectual property rights and ensured equal rights to government procurement.
National treatment to foreign investors under Chinese new FIL will edge out India's liberalization in Single brand retail. National treatment will be offered in issuing business licenses for retail trade. Hitherto, foreign investor in retail sector must go through stricter licensing procedures. First, they have to obtain license from Central Government, Ministry of Commerce, China (MOFCOM) and then registration approval from State Administration of Industry and Commerce (SAIC). Domestic investors can obtain license directly from SAIC. After the new FIL, foreign investors can obtain license directly from SAIC at par with domestic investors
The new FIL will open a new door for foreign investors to produce in China and export to vast infrastructure development projects under BRI initiative (Belt and Road) through the new law for equal rights for government procurement. Currently, over 60 percent of Chinese funded BRI contracts go to Chinese firms.
Given the situation, India should reinvent its FDI in multi-brand retail, alongside its rationalization in Single brand retail.
—(IPA Service)

 

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