The recent committee of secretaries approval, as reported in the media, for permitting FDI in multi-brand retail, while tying such liberalisation to minimum investments in back-end infrastructure, raises questions of policy formulation and implementation. Attracting FDI in the retail sector is important for a host of public interest reasons, and the very fact that imposition of counter-obligations on potential investors are under consideration amply demonstrates the government’s commitment to providing concomitant benefits to domestic constituencies.
International experience in related sectors shows that implementation and monitoring of such complex policies are likely to be knotty and will require fitting regulations. This is important, since a well-crafted regulatory scheme alone can ensure that the policy is attractive to investors while reducing the scope of non-fulfillment of obligations and attendant disputes and differing interpretations during post-hoc evaluation and audit.
For instance, since state governments are expected to be stakeholders in the scheme, it is important to clarify if states are permitted to impose additional obligations of their own on interested investors, either directly or indirectly. Will these additional obligations be factored in while estimating the fulfillment of obligations by a foreign investor? To what extent will subsidies or incentives for infrastructure development, whether from central funds or from dedicated state resources, be factored in for the purposes of discharge and claims? How will reliability and robustness be ensured across-the-board in evaluating the discharge of obligations, with such a number and variety of different stakeholders in the evaluation process? How could perverse competition amongst states, through ambitious inducement or incorrect certification, be mitigated or eliminated?
Further, since the 2011 release of the FDI policy allows investment-in-kind as FDI, it is important to clarify if imports of capital equipment will be excluded from claims of back-end infrastructure investment so as to avoid double-counting? Just how ?back? is back-end required to be? How will promises made by investors be enforced when the permission for FDI would be required by them ab initio, much before the long-term discharge of obligations of back-end investments in infrastructure? How will WTO-compatibility be ensured?
The answers to many of these issues could interestingly be found in countertrade obligations routinely imposed on strategic public procurement. Almost 130 countries around the globe have ?counter-trade? or ?industrial cooperation? regulations (sometimes also referred to as ?offsets?) that apply to high-value public procurements. These obligations usually take the form of minimum export requirements imposed on foreign vendors supplying high-tech equipment, where credit is given for value-added manufacturing undertaken on supplier initiatives in the buying country. However, only a handful of such countries could translate their counter-trade policies into actual fostering of indigenous high-tech manufacturing, and the benefits have resulted from well-crafted counter-trade regulations.
While imposition of requirements related to local content, trade-balancing, and restrictions on foreign exchange and exports are prohibited under TRIMs, it is worthwhile to note that disciplines of the TRIMs Agreement focus on discriminatory treatment of imported and exported products, and do not govern the issue of entry and treatment of foreign investment.
Alternatively, if aspects like mandatory minimum sourcing from MSMEs appear problematic for imposition from a ?National Treatment? perspective, an aggressive policy option could be making such sourcing mandatory even for domestic companies of similar size, scale and operations.
In order to be effective, the policy may need to lay down the specific activities eligible for discharge of obligations, the manner of their evaluation and the time-frame(s) for their discharge, including extensions, penalties and corrective action. It may also be important to lay down rules for avoiding duplication of benefits, since technical infrastructure in terms of imported capital goods could be claimed both as FDI and as fulfillment of investor obligations. A value-addition check, in terms of removing components of imported products and services, including royalty payments, may be useful here, as is already the norm with counter-trade contracts.
A collateral aspect is whether the investor will be required to directly discharge the counter-obligations, or whether s/he could claim eligibility for third-party discharge. The international best practice in the case of counter-trade contracts is to disallow third-party transactions, in order that causal relationships are established, and in order that the foreign vendor does not resort to trading of obligations but takes up local activities specifically in exchange of the benefits obtained.
The regulatory construction in imposing counter-obligations on FDI in multi-brand retail will thus be an interesting policy space to watch for; and it should hold important lessons for lateral application in many other spheres of government activity, wherever such mandates need routine imposition and effective monitoring and implementation.
The writer is an IAS officer. Views are personal