Cabinet approves ‘dilution of safeguards’ for FDI inmultibrand retail

The Cabinet Committee on Economic Affairs (CCEA) on Thursday approved “dilution” of certainsafeguards including relaxing the 30 per cent sourcing norm and dropping the mandatory 50 percent condition for backend infrastructure investment which were approved by Parliament whileallowing 49 per cent foreign direct investment (FDI) in multibrand retail announced last year.

The move to dilute these conditions met with strong resistance from the Ministry of Micro, Smalland Medium Enterprises (MSME) but they were overlooked by the CCEA while approving thenew norms seeking to attract much needed FDI investments by global retail chains in multibrandretail trade (MBRT). At the time of granting approval to the 49 per cent MBRT policy last year,Parliament called for putting in place certain safeguards to protect the interests of the Indianindustry especially small scale trade and also to ensure that investments are made in a big wayin backend infrastructure.

The Cabinet also approved increasing the number of cities to be covered under the MBRTpolicy by amending the clause of permitting cities or States with less than 10 lakh populationsalso to open front end stores with the permission of the States or Union Territories. The Hindureported on July 31, the move by government to dilute the norms for entry of foreign retail giantsunder the MBRT policy.

The 30 per cent mandatory sourcing from small scale industries clause has been waived off.Under the new policy, medium scale industries with total investment not exceeding $2 millionwould also be made eligible for sourcing of manufactured/processed to products. The newpolicy proposes that this requirement would be reckoned only at the time of first engagementwith the retailer and such industry shall continue to quality for this purpose even if it outgrowsthe investment of $2 million during the course of its relationship with the said retailer.

However, the MSME Ministry, in its comments, voted against the open-ended engagement ofMSMEs with their retailer under provision of 30 per cent procurement even if they outgrow theinvestment limit. It was of the view that a three-year period from the day a MSME outgrows theinvestment limit of $2 million would provide the required space to equip itself independently to

supply to the retailer without being covered under the 30 per cent procurement. Such a movewould have allowed for a larger number of MSMEs being covered under the provision of 30 percent procurement by the retailers in MBRT, the comments by MSME said.

In another big concession to global retail chains, the CCEA approved `dilution’ of the clause thatmake it mandatory for them to invest at least 50 per cent of total FDI brought in the backendinfrastructure. Under the new policy, the 50 per cent of total FDI investment would only apply tothe first tranche of $100 million to be invested in backend infrastructure within three years.

This also faced opposition from the MSME Ministry which stated that the investment in thebackend infrastructure and the need for it was a primary reason for permitting FDI in MBRT.“Diluting this condition would strike at the very rationale of allowing FDI,” it protested in theCabinet note.

FDI caps hiked

The Cabinet Committee on Economic Affairs on Thursday approved hikes of foreign directinvestment (FDI) caps in many sectors — from 74 % to 100 % in the telecom sector, from 26%to 49% in the insurance sector; the Cabinet Committee on Security has been authorised to gobeyond 26% in defence on a case-to-case basis. It also hiked sectoral caps and changed theapproval route in petroleum and natural gas, single-brand retail, power and commodityexchanges in certain other sectors. These decisions were taken at the meeting of the CCEAchaired by Prime Minister Manmohan Singh here.

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