The inter-ministerial group (IMG)) looking at how to battle the high inflation has recommended opening up multi-brand retail to foreign direct investment and changes in agriculture marketing laws, (APMC Act).

?We are taking a clear position on FDI in multi-brand retail. Of course, it is a recommendation, not policy,? chief economic advisor Kaushik Basu, who chairs the panel, said on Friday.

Making a strong case for opening up multi-brand retail which till now has not moved due to political risk involved, the panel said reform in the retail sector will be an effective tool to bring inflation down. Headline inflation in April was at 8.66% despite nine rate hikes by the Indian central bank since March 2010.

Opening up the doors for FDI will bring new technology which will expand the organised sector. It could provide remunerative prices for farmers and fair prices for consumer especially during peak marketing season. India’s organised retail sector is restricted to only 4% while countries like Japan has 66%, Malaysia has 55% trade in organised sector. The panel also pointed out the example of China which opened up its retail sector only in 2004 and today has 20% of it in organised sector.

The panel hopes that the entry of large corporates will gradually use the Indian outlets to sell their products even outside the country. This will expand the market for the Indian products outside which is out of reach for small players as of now.

The present FDI regime allows 51% foreign investment in single brand retail and 100% in wholesale cash and carry business. Though 100% FDI is permitted in cold chain through the automatic route in the absence of FDI in retail, the flow of such funds to the sector has been insignificant.

The ministry of consumer affairs and public distribution initially suggested a cap of 49% FDI in multi-brand retail, while the micro, small and medium enterprises ministry?s recommendation is for 18% FDI. In July last year, the government had floated a discussion paper on the topic. But the recent skyrocketing of food prices and the declining inflow of FDI have opened a door for the Government to take a more ambitious decision on the prickly issue.

A crucial argument against allowing foreign investment in retail is the belief that small retailers will suffer because of penetration of foreign players in the market. However, to check the interest of the farmers and maintain competition, the panel suggests that a couple of players to be allowed in the sector and FDI should be allowed in specific areas which does not hurt the business of small traders.

Apart from FDI, the panel favours formulation of a model Agriculture Produce Marketing Committee (APMC) law, which could be adopted by the states to remove supply bottlenecks at the local level. The panel endorses the view to re-visit the model APMC Act of 2003 which could not get implemented.

?There is a need to revise the AMPC Act to reduce the price gap between farm gate and consumer prices. We need a model act to be adopted by states,? he added.

Separately, Basu said that government is likely to revise its growth forecast downwards as high crude oil prices are expected to disrupt the fiscal calculation of the country. The government had projected growth of about 9% for the current fiscal year but high inflation and the central bank’s ongoing tightening of monetary policy have tempered growth forecasts, and many private sector forecasts are substantially lower. Basu said the new growth forecast for the current fiscal will be made in June.