Thursday, March 10, 2011

Govt may allow FDI in multi-brand retailing

NEW DELHI: The government is looking at allowing foreign direct investment (FDI) in multi-brand retailing as part of a slew of measures to make India more attractive to overseas investors. 

Senior government officials told TOI that the thinking was that a gradual opening up would be a better strategy with global chains first allowed to open stores in metros, while wholesale cash-and-carry being limited to smaller towns and cities, at least for the moment. 

The move being piloted by the Department of Industrial Policy and Promotion is at the stage of discussion with political clearance yet to be accorded to the proposal. Once there is consensus on the issue within UPA, which is unlikely until elections in five states are over, states will need to be taken on board, a senior government official said. 

The Economic Survey, which was tabled in Parliament last month, had also suggested gradual opening up of the retail sector with the initial go-ahead limited to a few cities. 

At present, the government allows 51% FDI in wholesale cash-and-carry where global players such as Wal-Mart and Carrefour are only allowed to sell to bulk customers such as hotels, canteens and even local retailers. 

Officials said the move to open multi-brand retailing is part of the plan to "send the right signals to foreign investors", some of whom have chosen to stay on the sidelines since a string of scandals hit the headlines last year. 

By allowing greater FDI in some key sectors, the government will also be able to deal with the widening current account deficit. In fact, stepping up FDI was a key issue on the table of financial sector regulators — RBI, Sebi, Insurance Regulatory & Development Authority and the Pension Fund Regulatory & Development Authority — and finance ministry officials last week. The issue was discussed at the first meeting of the sub-committee of the Financial Stability and Development Council. 

Sources said by piloting the insurance and pension bills, the government would signal that it was still serious about reforms. 

There is also a move to amend the Factories Act and raise the FDI ceiling for defence production to 74% from 26%. 

While the Department of Industrial Policy and Promotion had floated consultation papers for allowing FDI in multi-brand retail and raising the cap for defence production, the government is yet to thrash out a consensus. 

The government's appetite for reforms is being driven by dwindling FDI flows. According to latest data, inflows declined 23% to $16 billion during April-December 2010, compared to nearly $21 billion in the same year ago period. 

The government's assessment is that some of the current account deficit would be trimmed once funds to set up the Posco steel plant in Orissa, an investment of $13 billion, starts flowing in. BP's proposal to acquire stake in Reliance's oil and gas blocks and the joint venture with the Mukesh Ambani-controlled company are also going to help FDI flows with around $14 billion.

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