The document argues that the Indian government should remove conditions on foreign investment in retail to encourage investment. It suggests allowing foreign investors to own up to 74% of retail ventures without restrictions. Conditions have deterred foreign retailers and could enable rent-seeking proxies instead of genuine investment. Simplifying rules without conditions would attract investment that benefits many industries and consumers.

1. For FDI Without Strings Attached
Let foreigners invest in retail without conditions
Now that the stiff conditions attached have deterred foreigners from taking up the
government’s offer to let them invest in India’s fledgling organised retail industry, the
government is reportedly toying with a new idea: remove the conditions if the foreign
investor is content to hold a stake not higher than 49%. The thought that the
conditions need to be removed is entirely sensible and welcome. The opposite holds
true for the proposal to make freedom from preconditions contingent on the foreign
investor limiting its stake to 49%. This government staked its majority when it
overruled opposition from the secondlargest member of the ruling alliance to open up
the retail industry to foreign investment. It is silly for the government to put all kinds
of riders on that opening up, only to defeat the policy goal for which it reduced itself
to a minority for the remainder of its term.
If the government hopes to nudge the foreign retail companies to buy minority
stakes in ongoing domestic ventures, it hopes wrong. For one, it is wrong-headed for
the government to continue to dictate investment decisions in such a sector far
removed from any strategic concern. For another, a more likely result of such a policy
of minority foreign investment being allowed in retail is to create rent-seeking
opportunities for some Indians, who would be more than willing to act as proxies for
the minority foreign investor. Such proxies, who enter into covenants that hand over
effective control and beneficial rights to the minority investor, in return for a hefty
fee, have surfaced in telecom in the past. Is it the government’s policy to turn retail
also into a happy pasture for such proxies?
Yet another far-reaching proposal is to open up the retail sector to the extent of
74% of the total investment to foreigners. This is what should be done. Scrap
conditions, make simple rules that do not require a consultant to decipher and watch
the money pour in. The rupee would give you a thumbs up, so would the real estate
industry, besides consumers, and, eventually, farmers who have the sense to acquire
organised agency.

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