Schizophrenia over FDI
Two consumer-facing sectors of the Indian economy remain perpetual hostage to successive governments’ schizophrenia about foreign direct investment (FDI). One is the airline industry, the other is retailing. The broad policy approach appears to be blissfully detached from the realities of business. Foreign dollars are welcome, foreign ownership and management are not. Within this broad rubric, however, there are exceptions, all of which leave potential investors confused about policy directions.
A reminder was offered on Tuesday by the CEO of Qatar
Airways, Akbar Al Baker. He said the airline would wait a year for permission to start an airline in
India after which it would look elsewhere. Qatar had expressed its intention to apply for an airline licence in May this year but has gotten nowhere.
His contention, expressed to reporters on the sidelines of an aviation meet in the capital, is the illogical nature of Indian aviation policy. It allows 100 per cent foreign investment in a scheduled airline — but only if the investor is not a foreign airline. Foreign airlines that want a piece of India’s booming aviation market have to form 49:51 per cent joint ventures with Indian partners.
Aside: Mr Al Baker is probably unaware of the famous “comma controversy” of 2013. Press Note 6 of that year enabled new Indian airline companies to enter the fray, much to the chagrin of incumbent domestic airlines that had lobbied to keep new competitors out. The note read: “The government of India has… decided to permit foreign airlines also to invest in the capital of Indian companies, operating scheduled and non-scheduled air transport services, up to the limit of 49 per cent of their paid-up capital.”
The comma after the term “Indian companies” was the clincher that domestic competitors had not expected. Instead of suggesting that only existing Indian carriers would be recipients of foreign investment, the punctuation mark extended the policy to any new domestic airline company being set up. The incumbents’ chagrin was understandable because it changed the playing field significantly (it enabled Singapore Airlines to tie up with the Tata group to start Vistara, for example). Quizzed by the press about this strategically placed comma, then aviation minister Ajit Singh tersely said, “I also know English.” On such grammatical quirks has India’s aviation policy hinged!
What’s the problem with having a fully foreign-owned airline operating in the domestic skies? The government has never explicitly explained. Even a 49 per cent stake will scarcely reduce the level of foreign managerial participation, after all. Indeed, Qatar had evinced interest in tying up with IndiGo under the extant policy, but India’s largest domestic airline has not reciprocated. Mr Al Baker says his airline is not interested in a smaller stake, indicating that Qatar wants to play a major role in its Indian operations.
In the US and some European markets, reservations about allowing foreign airlines on domestic routes centre on security. In India, the issue seems to be linked to a vague concern about “Indian managements” — even though most domestic airlines were stewarded by foreign CEOs — including, lately, IndiGo — and many hire foreign pilots.
Perhaps no industry reflects the policy-makers’ dilemma over FDI more than retail, where four levels of policies operate, differentiating the industry in a way that defies sanity and business logic.
One, in wholesale retail — that is, in supplying other retailers — the government permits 100 per cent FDI.
Two, in “multi-brand” retail the FDI limit is capped at 51 per cent but subject to various conditions (though entry via a tie-up with Indian franchisees is no problem).
Three, there’s “single brand” retail, in which 100 per cent FDI is permitted on the automatic route but subject to certain conditions. Till January, FDI in single-brand retail was capped at 49 per cent (acquiring the remaining 51 per cent required permission), so this was considered a major “reform”.
Four is an entirely different policy architecture for e-commerce with two subsets: B2B (also known as the “marketplace model”) and B2C (the “inventory model”). 100 per cent FDI is allowed in the first (which is how Amazon and Walmart operate) but banned entirely in the second. There are many conditions that hedge these broad policies, which keep the legal teams of all large retailers engaged.
Convergence, the global trend in retailing, appears to have passed policy-makers by.
As with foreign airlines, so with retail, the concern appears to be to protect a domestic constituency, specifically the myriad small traders and kirana stores. No regime has been able to explain why large domestic retail chains could not have had the same deleterious impact as a large foreign chain — unless this differentiated treatment reflects a tacit admission of relative efficiencies.
The biggest irony is that an issue that appears to exercise policy-makers is one that does not bother Indian consumers. If nationalism directed consumer choices, then Onida and Videocon would still have the largest market share in TVs, Hindustan Motors in cars, Air India in civil aviation and McDonald’s and Domino’s Pizza would have exited India long ago. Should democratically elected governments worry about what the people think?