These are the days of optimism on foreign direct investment (FDI) in the retail sector. It is interesting to note how little background preparation has been made to make this round of liberalization successful. The deal-breaking hiccups will occur in a sector vital for retail: agriculture.
Today, agricultural output in different markets—by produce and region—is either cornered by government (for example, foodgrains in north-west India) or by politically connected cartels of local traders. The last is especially detrimental to a foreign investor from a value-proposition perspective. When it comes to fruits and vegetables, unless changes are made in the Agricultural Produce Marketing Committee (APMC) Acts, foreign retailers will have a difficult time getting their hands on any fresh produce.
In many states, one can’t bypass APMCs to make purchases. Those who enter these markets have to pay very high taxes for what they buy. For example, Punjab—a vital state for securing supplies—levies 9% tax on fruits and vegetables and 13% on foodgrains. Haryana has a similar tax structure. These taxes are money spinners for these and other states. Very often, these sums are used to pay the salaries of government officials. In Delhi, the local traders lobby at APMC is so strong that dismantling it is practically impossible.
There are, of course, other options for foreign retailers. They can, for example, go in for multiple-year contract farming directly with farmers without legal impediment in north-west India. There is, however, a grey area: in case of cash crops, taxes can be levied and contract farming is likely to be construed as “tax evasion”. There are other states that are certain to frown at contract farming of any kind unless some government agency is involved.
Clearly, the legal framework necessary for making retail FDI successful does not exist. The Union government gave no thought to this issue. A solution, if it can be found at all, will be complicated. Agriculture is a state subject and there are 28 states and seven Union territories. Even if a large firm does not have a presence in all the states, negotiating with even a handful of governments will impose large transaction costs, negating any gains.
It is, of course, impossible to convince all the states to go ahead with FDI in the retail sector. But where they have shown willingness to participate, the Union government should actively intervene and get these roadblocks removed.
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