51% FDI in multi-brand retail soon

In an exclusive interview with FE, the minister of commerce, industry and textiles Anand Sharma stresses the need to spur investments in the manufacturing industry and give another policy push to exports.

In an exclusive interview with FE, the minister of commerce, industry and textiles Anand Sharma stresses the need to spur investments in the manufacturing industry and give another policy push to exports. He discusses the high trade deficit as well as the suggestion that some imports could be curbed, and justifies retroactive amendments to tax laws amid concerns expressed by global investors about what they see as the ?unpredictability? of India?s policies. ?This (Vodafone case) is not an investment issue but a tax matter,? he says. Sharma indicates that the government is firm on liberalising its FDI policy further. ?We are hopeful that 51% FDI in multi-brand retail can be implemented soon, with the support of many states which are convinced that this policy will benefit their agrarian economies and boost farmer incomes,? he tells Timsy Jaipuria and KG Narendranath. Excerpts:

The latest industrial output data ?a 3.5% contraction in March as opposed to 9.4% growth in the same month a year ago?seemed to validate the fears that the economy is languishing in a torpor. A 21% contraction in capital goods output in the month showed that investors are downbeat about the future.

Although IIP had a robust growth of 8.2% in 2010-11 against 5.3% in 2009-10, it slid down to 2.8% in 2011-12. The contractions in the manufacturing and mining sectors (growths of -4.4 % and -1.3%, respectively) are primarily responsible for this. In 2011-12, continuing global crises, especially in the eurozone, sluggish domestic demand, fall in consumption expenditure, tight monetary policy (till recently), hardening of interest rates, low level of investment etc are responsible for a fall in the IIP growth rate.

It is extremely important to rev up investments. The government?s thinking has clarity and focus, but within a coalition government there have to be endorsements (from many). A broad-based consensus in a national sense in favour of policies to spur growth is what is needed. We feel that there exists such a consensus on major initiatives, but there have been some reservations on initiatives like FDI in multi-brand retail trading among one or two coalition partners.

Given the huge volatility in IIP data (especially of the capital goods sector) over the last several months, questions about the credibility of the data have become more valid. Even the chief statistician of India TCA Anant and Prime Minister?s Economic Advisory Council chairman C Rangarajan have underlined the need for immediate steps to improve data flows from sundry sources.

The Central Statistics Office (CSO) under the Ministry of Statistics & Programme Implementation is responsible for construction and release of IIP. The general scope of the IIP is in conformity with the recommendation made by the United Nations Statistics Division, comprising mining, manufacturing and electricity sectors. Weightage for each sector is derived as per its percentage share in the GDP at factor cost in the base year. The CSO has a system of checks to ensure accuracy of the production data, once it?s received from the source agencies, before releasing the IIP.

In case the variation of the production data for a month over the production data of the previous month exceeds 20%, or if the variation of the production data for a month over the production data of the same month in the previous year exceeds 30%, such cases are referred back to source agencies for confirmation.

As far as restructuring of IIP is concerned, the same is carried out at regular intervals. In order to capture the dynamics in the structure and composition of industrial production in IIP, reviews of existing methodology in compilation of IIP such as shifting to a new base year, selection of appropriate items basket, weightage assignment method of data collection etc are carried out through a specially constituted working group. At present, a working group under the chairmanship of Saumitra Chaudhary, Member, Planning Commission, is in charge of the matter.

Do you have a target for FDI inflows this fiscal? Given the need for increased capital inflows, especially for FDI which is non-debt-creating and more permanent in nature, what steps are being taken to improve the investment climate?

We have received nearly $47 billion as FDI in 2011-12. This figure includes re-invested earnings and other capital. This is a record insofar as FDI inflows are concerned.

The reform process continues and there is absolutely no question of it being stalled or reversed. We are hopeful of implementing 51% FDI in multi-brand retail, with the support of many states which are convinced that this policy will benefit their agrarian economies and boost farmer incomes. (Last month?s Cabinet decision to this effect has not been cancelled; only its implementation was deferred). If Gujarat, Andhra Pradesh, Rajasthan, Haryana and Maharashtra are willing to allow global retail giants to set up shops, why should they be deprived of the right to do this just because some other states are not favourably inclined towards the idea right now? After all, states are the licensing authorities for the retail business. FDI in multi-brand retail will be allowed only in cities with a population of 10 million and above, so that there is little (adverse) impact?if any?of the policy on small retailers. The proposed policy would also come with riders: 50% of the investment and 50% job creation will have to be in rural areas and 30% compulsory sourcing from small and medium enterprises.

We will also approach the Cabinet soon with the proposal to let foreign carriers pick up stakes in Indian airlines. It?s obvious private airlines in the country are in need of funds for operation and service upgradation.

But recent policy decisions like retroactive amendments to tax laws and the government?s unrelenting stand on the Vodafone tax issue have bewildered foreign investors.

I think the finasnce minister has explained it. These are classificatory amendments meant to make clear the intent of the law. Other countries have had even more substantive (retroactive) amendments in tax laws. The UK amended Section 58 of its Finance Act with retrospective effect in 2008, with a view to taxing transactions going back to 1987.

I am not getting into an argument about who did what, but the larger issue in question is that we are not going to tax all the transactions that occurred in the past retrospectively. The only thing is that when a transaction takes place in one country and all the relevant assets are in another country, it is not just an investment issue but also a revenue matter. In the Vodafone case, the transaction took place in Cayman Islands and neither the UK (where the acquired company is based) nor India (where the underlying assets are located) got any tax. I think this is not an FDI issue as no FDI came into India as the acquisition took place offshore.

India could manage a 21% annual increase in exports to $304 billion in 2011-12, despite the odds of a dismal global situation stacked against our exporters. But over the last few months, the growth rate has generally been on the decline with even a contraction (5.7%) in March. The current level of trade deficit at $13-14 billion a month is clearly not sustainable, coming as it does on top of the record high deficit of $185 billion in 2011-12. There have been talks about curbing some non-essential imports. What are your views?

There are concerns over exports growth because of the contraction in world trade. There is a deceleration globally; the eurozone crisis is impacting us adversely. Other emerging economies including China have been facing problems too.

The idea is to have policies that would help achieve the export target of $500 billion by 2014 and $750 billion by 2017. The strategy paper prepared by the department of commerce has laid down the path for achieving these targets. It is too early to predict export growth and trade deficit for the coming years, given the current global uncertainty.

But the import-export scenario is tough. The rising import bill (there was a decline in import growth in April to 3.8%) is also a concern that needs to addressed.

The spike in import bill is also because of products other than oil, whose imports are unavoidable.

Oil and gas imports reflect a pressure on the import bill. We are also increasingly importing edible oil, pulses and fertilisers.

Import of gold has seen an unprecedented increase in recent years. Can?t these imports be curbed through policy action?

A major part of the gold which we import is re-exported. Plus, historically, Indians have always stored gold. You can say that conventional wisdom was to have land or gold. I don?t think you can quantify the amount of gold imports that are used for re-exports. But if you are importing gold worth $60 billion a year and if you are re-exporting $50 billion excluding diamonds (this is just conjecture), then you need to have clarity about that before making judgements on the policy.

Do you plan to give exporters some additional sops in the forthcoming annual review of the foreign trade policy (FTP)?

I have recommended an extension of the interest subvention scheme for exporters which expired on March 2012. We have gone for market diversification with a lot of zeal and this has helped a lot. There are various labour-intensive sectors which need support.

We believe that consultations with domestic stakeholders are an essential element of the FTP formulation. This helps in taking mid-term corrections. The director general of foreign trade has held consultations with export promotion councils, commodity boards and apex chambers of commerce and industry. The board of trade will meet on June 1. These interactions will be fruitful in deciding what assistance can be given to exporters. Discussions are simultaneously being held with the ministry of finance.

The general notion is that the rupee’s fall would help exporters. But many of our major export sectors like gems and jewellery and chemicals are very import-intensive.

First, you don’t book your orders in rupee. Secondly, a major content in our exports, as you said, is of imports, which neutralises the benefit of the rupee’s fall. Thirdly, you need to take a view of the macro import-export scenario to assess the cumulative impact of the rupee’s movement. Though exports are growing thanks to diversification, there is no sign of a surge in demand. Our import bill is increasing primarily because of oil prices. So, imports are growing faster than exports.

The Foreign Investment Promotion Board (FIPB) was tasked with screening FDI proposals in the pharma sector after the brownfield/greenfield policy distinction was created. There is a view that many FDI proposals are getting blocked.

The government is conscious of the need to attract FDI in the pharma sector, while also addressing the concerns related to public health. There is a case for effective oversight of mergers & acquisitions in the sector. Such oversight is necessary to address the serious concerns that could arise from the public health perspective. So, the government notified FIPB as the oversight mechanism for this purpose. At present, the board continues to perform this function and no change in this position is being contemplated right now.

Tell us about the National Manufacturing Policy, which envisages setting up special zones for promoting investments in the sector.

The policy is being implemented with vigour. Reasonable progress has been made on the issue of rationalisation and simplification of business regulations, which required instructions to be issued by the concerned ministries. Other schemes are also in the process of being formulated. Constitution of the approval/monitoring mechanism is under way. States have been requested to identify land banks for setting up National Investment and Manufacturing Zones (NIMZs). States have also been requested to initiate the process of rationalisation and simplification of state-level business regulations. Andhra Pradesh, Karnataka, Maharashtra and Kerala have evinced interest in setting up NIMZs.

How have the talks on the proposed India-EU FTA progressed?

The negotiations between India and the EUon the Broad-Based Trade and Investment Agreement are at an advanced stage. Both sides have made considerable progress in the 14 rounds of negotiations held so far. Regular and consistent engagements on various issues are taking place at different levels. There are complex issues involved in this Agreement which require greater understanding to seek solutions that are practical, mutually beneficial and acceptable to both sides in order to reach a balanced and ambitious agreement tempered with reality. Both sides are committed to an early and balanced outcome, and hope to conclude negotiations at the earliest. For this, officials continue to engage intensively. There will be a Ministerial meeting at the end of June to monitor the progress made in the negotiations.

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First published on: 24-05-2012 at 04:00 IST