Disappearing fig leaf

It is difficult to see how much longer the government can continue with the fiction that it does not allow foreign direct investment in the retail sector, and for that matter even real estate, when established foreign firms are setting up shop in the country to get into these businesses, and doing so in broad daylight. The ban on foreign investment in the retailing business was imposed to protect the lakhs of small mom and pop shops (kiranas) that would get hit if chains like Wal-Mart came into the country. There was also the political angle, in that the small store-owners are believed to be a support base for the BJP, which led the NDA government; and the UPA is stymied by the Left’s opposition to foreign investment in as many sectors as it can make an issue of.

Now, Sunil Mittal of the Bharti group has ended months of speculation by announcing that Wal-Mart will be his partner in Bharti’s retail venture! While Wal-Mart will not be allowed to set up its own stores in the country, Mr Mittal will set these up, and (presumably) use the Wal-Mart name in return for a royalty. Wal-Mart may or may not run the back-end of the business, but it is certain that a large part of the technology and business know-how will be theirs. In which case, hasn’t Wal-Mart come into the country and into the retail business—whatever the law might say?

The fig leaf is that foreign firms such as Wal-Mart are not allowed to sell at the retail level; all they can gain is entry into what’s called the enterprise (“cash and carry”) segment, and into businesses associated with retailing. Honouring this distinction, Metro of Germany is able to sell to small businesses in Bangalore and may soon be doing so in Kolkata as well. But there is nothing in the FDI rules for the retail business that a smart lawyer cannot circumvent while structuring a joint venture, exactly as has been done in telecom. The political point to note is that Wal-Mart is no different from Bharti or Reliance in terms of whatever impact its chain stores will have on the kiranas. It’s difficult to argue that large Indian firms getting into retailing are harmless, and only foreign retail chains will hit the kiranas. Why not drop the pretence and let the investment come in openly?

The story in real estate is no different. On the opening day of the India Economic Summit in the Capital, the head of a global real estate giant was talking about his Indian presence, sitting right next to the finance minister—FDI is not allowed in apartment complexes or small plots of land, but is allowed in townships which, by the way, can have apartment complexes and individual plots of land! In which case, why the fiction of not allowing FDI in real estate? The justification given here is that allowing FDI in small parcels of land will drive up prices that are already artificially high. This is illogical since the real issue is poor supply, thanks to policies that don’t allow for quick conversion of agricultural land for industrial/commercial use. In any case, large foreign players, who have to go by governance rules framed by global boards, are unlikely to be able to deal in cash; so allowing them in might help clean up the property market.