Policy a victim as ministries scrap over FDI nitty-gritty

In a bid to usher in reforms in a hurry, the basic rules about policymaking were forgotten. The end result was a policy chaos, as the IKEA episode has proved

alam-srinivas

Alam Srinivas | January 15, 2013


While commerce minister Anand Sharma (right) announced that all hurdles have been lifted for global home products major IKEA, Chidambaram`s finance ministry insisted that it needed to study even shortlisted categories. Result: IKEA’s application may not be taken up at the next FIPB meeting on Friday.

From policy paralysis to policy pandemonium! This is the way the UPA-II government has transited over the past few months. From a regime that was unable to take any decisions due to political and other compulsions, it has transformed into one that aggressively embarked on the economic reforms path with its eyes shut. A glaring example was the manner in which it allowed entry to foreigners in organised retail, especially in the single-brand arena.

The road to foreign direct investment (FDI) in retail was marked by complete chaos. One, there was little understanding about the nuances of policy-making. Two, as usual, different departments and ministries sang in different tunes. And, finally, corporate lobbying played its due part to tweak, bend and nudge the policy in various directions.

Nothing epitomises this process better than the twists and turns witnessed by the Netherlands-based retail major, IKEA.

Seven months after IKEA filed its application in June 2012 to invest $2 billion in the Indian single-brand retail sector it has grappled umpteen times with the policymakers on several issues. Latest reports indicate that its re-reworked proposal may not be considered, as earlier scheduled, by the Foreign Investment Promotion Board (FIPB) at its meeting on January 18. So the world’s largest seller of furniture may have to wait a few more weeks, or may be more.

We have no idea, Sirji

Last September, the government allowed 51 percent FDI in multi-brand retail for the second time, after its initial announcement in 2011 was put on hold. It promptly announced for the nth time that the decision did not require Parliament’s consent as it was purely administrative in nature. It added that respective states had the choice to stop global retailers like Wal-Mart from setting up stores in their cities. Little did it realise that it was totally out of tune on the first note, and slightly off on the second one.  

Later, the officials admitted that FDI in multi-brand required changes in Foreign Exchange Management Act, which had to be cleared with a simple majority by Parliament. But this about-turn led to a lot of eggs on the government’s face, as it resulted in a debate in both Houses, where even its allies criticised the move, and then voted for the changes.

As a member of one of them stated, his party opposed FDI in retail but didn’t want the government to fall.

Similarly, once IKEA knew that India allowed 100 percent FDI in single-brand retail in 2011, it assumed (wrongly) that it can enter the lucrative market in all its product categories. Imagine the shock when the company learnt that there were other different laws for foreigners who wanted to open, for instance, restaurants. Now serving food and beverages in their stores is a key ingredient of IKEA’s global ‘concept’, but this did not fall in the single brand clearance.
International fast-food giants like McDonalds follow separate rules to enter India and, therefore, the government said IKEA cannot be allowed to sell food under its retail norms. Similarly, though IKEA procures products from other vendors to sell them in its stores, the finance ministry stuck to its contention that only products branded under the IKEA name will be allowed to be sold in India. It was a situation where the officials had no idea about ground realities.

What was hilarious was a misunderstanding of how global businesses work in practice. One of the issues raised by policymakers was that the company that had applied was different from the parent company that owned the IKEA brand. Thus, they said that the application was invalid since this was not allowed under its policy.

Little did they know that to legally protect their intellectual properties, MNCs separate their brands, trademarks and IPRs from their operational entities. 

Connection error between ministries

The IKEA imbroglio also highlighted the lack of communication between various wings of the government. Initially the commerce ministry and the ministry of micro, small and medium enterprises (SME) were at loggerheads. The latter wanted foreign retailers to procure more goods from local SMEs to give a boost to entrepreneurship. The government in its wisdom agreed that 30 percent goods sold by IKEA and others had to be purchased from such companies.

However, IKEA did not like such a restriction. One reason was that its global outsourcing procedure is extremely tough. It forces all suppliers to follow specific manufacturing, quality, corporate governance, and sustainable norms. It takes time to build these relationships, which then continue for several years once they are established.

It is not easy to do so in emerging economies like India; IKEA took many years to achieve the same objectives in Russia.

At this stage the commerce ministry, which backed IKEA to the hilt, forced the government to relax the SME norms. It was decided that though 30 percent of the products had to be procured from India, they should “preferably” be from the SME sector. IKEA had other apprehensions — for example, it wanted this percentage to be calculated over a period of time (3-10 years), rather than on an annual basis because of the time it took to include new vendors in its supply chain.

In the past two months, the commerce minister has fought the finance ministry over IKEA’s application. After several discussions, IKEA agreed to curtail the product categories it wished to sell — from the original 31 to 18 — as some of them were governed under different rules, and not by the single brand ones. It also clarified a few points; for example, the company said its in-house cafes will only serve food and beverages inside the stores and not allow customers to carry the products home.

Commerce minister Anand Sharma announced that all hurdles have been lifted. However, the finance ministry insisted that it needed to study even the shortlisted categories. This is the reason why IKEA’s application may not be taken up at the FIPB meeting on January 18. So, is the finance ministry being influenced by corporate and other lobbyists?

Lobbyists pester the government

As is expected when a large foreign company aimed to enter India, lobbying from both the company and its local competitors ensued with earnest. More important, the government bowed to such pressures and consistently changed its laws on single brand. IKEA’s success was clear from the fact that it forced India to relax norms related to local procurement from SMEs. It also convinced the government about the criticality of having restaurants and cafes in its stores, as is the company’s global practice.

But the full play of competitors’ lobbyists was quite evident in the manner in which IKEA was first told that it could sell all its products in India, and then asked to reduce the number of product categories. It smacked of inconsistency. Not many in the government understood the full expanse of IKEA’s global product range; most officials thought that it would sell furniture, furnishings and related accessories in the country. This was not the case.

To cite an example, when IKEA talked about textile products as a category, it meant the whole range from bedspreads, room furnishings, bath furnishings to kitchen ones. Similarly, its beachwear products included bikinis, beach towels, slippers, shorts, umbrellas, shades and others. In fact, the 31 product categories that it cited in its original application in June 2012 had hundreds and hundreds of sub-categories that encompassed thousands of products.

Only when the policymakers were confronted with the actual list did they fully grapple with its two key ramifications. The first was that if IKEA was allowed in some products, like fast-food cafes, it would clash with other laws specifically meant for fast-food chains. The second was that it would cause havoc in the local market and force several Indian manufacturers to shut shop, or become IKEA’s vendors.

This prompted local firms to lobby against IKEA and eject it out of certain products.

IKEA’s curtailed list, which the finance ministry further wanted to study, provided clues about which lobbies had succeeded in their endeavour. For example, the global retailer was asked to omit textile products, including apparel and fabrics, from the list. The opposition must have come from a slew of textile manufacturers, who feared that this was a backdoor entry for IKEA to sell fabrics in general, and not just furnishings for furniture or curtains or towels.

Similarly, there are many manufacturers of consumer electronics in the country. They are scared of cheap goods being imported from China and Taiwan and thus wanted this category to be struck off IKEA’s list so that India is not dumped with consumer electronics through IKEA’s global procurement network, which includes China as a huge supplier. Leather products, which are essentially produced by SMEs, were other items that proved to be contentious.

The fear among genuine SMEs in India was justified to an extent. They told the government that the 30-percent local procurement can be misused and manipulated by IKEA, or any other foreign retailer. For example, the retailer can ask an Indian trader to import goods from, say China or Taiwan, and then buy it from the trader. In its billing, the foreign retailer can show the procurement as ‘local’, which is legal. In fact, this is a standard practice to sidestep local buying rules.

The IKEA episode proves that the government was totally unprepared to deal with a complex and global marketing and procurement entity. The understanding among officials about single-brand retail had no relation with international business practices. In fact, no one had even studied IKEA’s business model before formulating the policies.

In a bid to usher in reforms in a hurry, the basic rules about policymaking were forgotten. The end result was a policy chaos. 

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