Tanu M. Goyal

Impact of the Retail FDI Policy on Indian Consumers and the Way Forward

In the post-reforms period, there has been a change in the purchase behaviour of Indian consumers. The large consumer base has attracted many global retailers and domestic corporates to invest in modern retail. The government has partially allowed foreign direct investment (FDI) in retail. At present, there is an ongoing debate on the impact of allowing FDI in retail. This chapter analyses the impact of the retail FDI policy on Indian consumers and offer policy recommendations at the national level. A primary survey of Indian consumers, aimed at examining their shopping behaviour across branded and non-branded products, knowledge of foreign brands and attitude towards liberalisation of FDI in retail brings out interesting results, including identifying factors determining the choice of modern retail outlets. It is observed that the purchase of brands varies across different product categories and for some consumers show distinct preference for non-branded products, which are purchased from traditional outlets. Hence, both traditional and modern retail coexist in India. While knowledge and use of foreign brands, especially luxury brands, is low, majority of the respondents is in favour of allowing FDI in retail. It is held that FDI in multi-brand retail would enhance brand knowledge, choices available to consumers and help promote branding even as the FDI policy should ensure consumer welfare.

Liberalizing FDI in Retail: Implications for India’s Trade Agreements

India is a proponent of liberalizing services in the WTO and in its FTAs. However, the country has not taken commitments in sectors such as retail in its trade agreements. This is because there are restrictions on FDI in this sector. India’s trading partners have been requesting for liberal commitments in the retail sector. In the year 2012, India autonomously liberalized FDI in retail, allowing 100 per cent FDI in single-brand and 51 per cent in multi-brand retail subject to certain conditions. Given this background, this paper examines the impact of autonomous liberalization on India’s commitments in trade agreements. The paper found that if India agrees to bind the autonomous regime in the trade agreements, it will increase India’s bargaining power in the WTO and FTAs. The country can trade-off commitments in retail sector for greater market access in areas of its trade interest. Binding the autonomous regime in trade agreements will speed up the negotiations process and lead to conclusion of pending agreements such as the India-EU bilateral agreement. However, there are some concerns. Since the FDI liberalization is accompanied by certain restrictions, which are only applicable to foreign service providers, India cannot undertake national treatment commitments.

FDI in Services and India

Developing countries, including India, are increasing relying on foreign direct investments (FDI) for raising finance for infrastructure development and other projects. Consequently, countries are undertaking policy reforms for facilitating investment flows. In India, services sector is the largest recipient of inward and outward FDI since liberalization. Yet, India continues to face certain challenges to both inward and outward foreign investments as a result of which, it has not been able to exploit its full potential. This article studies the trends and patterns in India’s inward and outward investment flows and analyzes its international agreements to examine the degree of openness across different services sector, assess barriers and suggest reforms. The article uses the Fink and Molinuevo (2008) framework to examine the architectural design of India’s trade agreements and their level of openness in investment in services. The article found that despite progressive liberalization, India continues to impose operating restrictions and regulatory barriers on foreign investors. India is not willing to take forward-looking commitments in investment in services and bind the autonomous regime. The article suggests that FDI is a ‘market access’ issue and it should be delinked from domestic regulation. Domestic regulation should not discriminate between foreign and domestic investors.

Performance of SEZs

The performance of the SEZs in India is widely debated and often misreported. To begin with, there is no clear benchmark to measure performance, and second, there is a lack of disaggregated data to support any analysis. This chapter therefore assesses the performance of SEZs in India against the objectives laid down by the SEZ Act 2005 using secondary data and information from a primary survey.

Challenges Faced by SEZs in India and the Way Forward

The discussions in the previous chapters suggest that SEZs in India have not been very successful, and several of the approved SEZs have failed to take off. This chapter focuses on some of the key barriers faced by the SEZ developers and units. These include barriers related to the institutional and regulatory mechanism, land acquisition, and changes in fiscal regime, among others. This chapter then suggests certain policy recommendations to turn Indian SEZs into a success story.

SEZs in Select Countries: A Comparison with India

The concept of special economic zones has evolved across the globe. Several developing countries have policies for the establishment of industrial zones that focus on exports and countries have set up strong regulatory and administrative frameworks to support them. Since different countries have different starting points and experiences in developing special economic zones, each country imparts important lessons for India. Using select country cases in Asia, this chapter compares their SEZ policy objectives, administrative structure, incentives, and contribution with those in India and makes recommendations for Indian SEZs.

SEZs and Other Industrial Clusters: Why Incentives Have Not Been Successful in Developing Manufacturing in India?

The central and the state governments in India have enacted over 300 policies and schemes, most of them for promoting the growth of the manufacturing sector. The majority of the cluster-based schemes can be dovetailed with incentives under the SEZ policy, implying that an investor can avail of the benefits under more than one scheme and/or policy. However, despite subsidies, grants and other incentives, manufacturing has not grown as expected. This chapter examines some of the cluster-based schemes and how these can be dovetailed with the SEZ policy. It also makes policy recommendations on how to support the growth of the manufacturing sector in India.

Quality of the Business Environment: SEZs Versus DTA

SEZs should be instrumental in creating a conducive and quality business environment. The success of SEZs would depend on their ability to attract units that are internationally competitive, which in turn would depend on the quality of infrastructure and the overall business environment that the SEZ provides. This chapter, based on a primary survey, assesses the quality of the business environment in SEZs and compares it with that in the DTA. The chapter makes broad recommendations to improve the quality of the business environment in SEZs for the long-term viability of SEZs in India.

Special Economic Zones and Regional Trade Agreements

SEZs and regional trade agreements (RTAs) can help to liberalise and facilitate trade. While both of them focus on the removal of trade barriers, their objectives are different. SEZs focus on improving a country’s export competitiveness, while RTAs focus on removing barriers to trade between trading partners. Hence, the two polices can be in conflict. This chapter discusses how India can synergise its SEZ policy with its bilateral and regional trade agreements and maximise the benefits for its industries.

SEZs in India: Evolution, Policy Framework and Current Status

India was among the first few countries in Asia to adopt the concept of export processing zones (EPZs), but they were not backed by formal legislation. Almost four decades later, India adopted the SEZ policy backed by a regulatory framework to develop special economic zones across the country. Since then, there have been several developments in the incentive structure, state-wise distribution, sectoral coverage and number of SEZs in India. This chapter presents the evolution of special economic zones in India, describes the policy framework and presents the current status of SEZs in the country.