FDI in retail indicates FII that India means biz: AZB

Ajay Bahl, founder, AZB & Partners and Sunil Jain, opinion editor, The Financial Express discuss about FDI in multi-brand retail and the legislative process around the passing of the Bill.

Also read: Retail shares retreat on FDI Bill worry

Below is the edited transcript of his interview to CNBC-TV18.

Q: Section 48, the amendment, the rules of Foreign Exchange Management Act (FEMA) say that the amendments have to be cleared by both the Lok Sabha as well as the Rajya Sabha. The government is confident of its numbers in the Lok Sabha and sure in the Rajya Sabha. If it doesn’t get pass by the Rajya Sabha what then happens?

Bahl: It is a problem. The law doesn't get changed. Even if you have a policy, policy can't trump the law unfortunately. As far as FEMA is concerned, multi-brand retail was for purposes of foreign direct investment in it was under the prohibited list. So it has to be removed from that list by an amendment of the law.

Q: So, if section 48 entails a vote, which it does in both Houses of Parliament and in Rajya Sabha the vote goes against the government; if it does get to a situation of a vote, the law does not change?

Bahl: Yes. There are number of other amendments incidentally. They have amended the Foreign Exchange Management Act (FEMA) to bring in a lot of other policy changes that they had not brought in into the law. So, that particular part of the amendment which is not approved, would then not constitute a valid amendment.

Q:  My assessment of the anti-FDI arguments is rather pedestrian. Playing on the same old paranoia that FDI is going to come in, everything will shut shop. Manufacturing will be adversely impacted, jobs will be lost, what is the big fuss about? Why is it okay for Indian companies, who are all fortune 500 companies, who are investing billions of dollars into the retail business to run organised retail chains, but not okay for a foreigner to run an organized retail chain?

Jain: It seems to be good to die at Reliance's hand rather than dying in the hands of Wal-Mart that seems to be the argument being made. The numbers which these people are talking about are completely pedestrian. The share of organized retail is 6-7 percent of the market. We assume that there is a huge jump and it increases three times in next 10 years, even then there will be enough place for the kirana’s to grow by 40 percent in the next 10 years. So, there is no problem as far as the kirana's are concerned.

If you look at the at-risk market, those 21 cities within the seven or eight odd states which have agreed to this the at-risk market is about 8-10 percent of the total market. So, in any case none of these numbers make any sense at all.

It is not the kirana that is closing today it is Subhiksha or Pantaloon which is selling part of its company to clear its debt. The big organised Indian retail is being protected. Kirana is just a slide show.

Q: How do you respond to the arguments? We come back again to this issue of FDI? FDI in indirect fashion already exists as far as the retail sector in India is concerned?

Bahl: If you don't look at FDI, take a foreign investment in its broadest sense, every listed company which is on the stock exchange can have a minimum of 26 percent foreign shareholding. Pantaloon has 22 percent Foreign Institutional Investors (FII) shareholding. Bata has 18 percent shareholding.

Titan has 16 percent. Tribhovandas has 11 percent. Therefore, economic value-wise foreign investment in retail is alive and kicking and you must appreciate that it has displaced Indian investment, because pre-IPO no foreign investor can come in.

So some Indian investor puts in money and that infact has been replaced by a foreign investor. It is just timing. FDI would have meant money coming in Here it means money came in from a Indian investor and got replaced by FIIs. As Chidambaram said that FDI is long-term, you cannot exit unless you make profit.

Q: What is the view of foreign investors on this development? Do foreign investors really care about the arguments that are being presented or do foreign investors want certainty, either you vote for us, you vote against us, but give us a clear answer about how we should proceed in this country. What are your clients telling you?

Bahl: The issue is not that FDI in multi-brand retail will suddenly flood investment in our country compared to what happened with telecom or other sectors. But it is a signal to the foreign community, to the world at large that India is back to business, India is open to business, and India is open to revisiting what it could not do.

FDI is a signal that we are heading in the right direction. As Sunil mentioned that the organised sector in this case is not the one who has a criticism. In the past every reform was challenged.

In telecom, earlier there was a judgement of the Delhi Science Forum, a writ petition was filed and Department of Telecommunications (DoT) objected it. MTNL objected privitazation, everything that you do. Where would we have been if we hadn't privatised.

Q: You heard what Mulayam Singh Yadav had to say in Parliament. You heard what the BSP leader Dara Singh had to say in Parliament. All indications at this point in time from political sources suggest that they are going to abstain. They are unlikely to vote in favour, but they will abstain. Given the kind of strident Opposition on the floor of the House, how do they extricate themselves from this situation? Do you believe that perhaps things could go horribly wrong for the government when it comes to numbers or do you believe that this is public posturing?

Jain: This is clearly public posturing. Even on the Rajya Sabha, these people are going to abstain. So, you will have the FEMA amendment that will go through. There is one little point that everybody is missing, we need to just stress on that for a moment. Sushma Swaraj said that McDonald's buys potatoes, but they buy them from abroad, they don’t buy them from India.

I think that's incorrect. The most important point which we need to point out is that if the farmer is actually getting shafted, if the farmer is not getting a good deal, guess who is responsible for that. The Punjab government levies a 14 percent tax on anything that comes to the Mandi. So, that’s 14 percent that goes out of the farmer’s pocket.

The Arthiya , the person that Mulayam Singh’s heart seems to bleed for, the Arthiya gets about 10 percent of the margin. So, the small farmer is actually being hit by the vested interests which are actually propped up by the state government or could be proxy. So, once you get in big retail, it is not a matter of whether it is Indian or foreign.

Anchor: Most states haven’t even moved on amending the Agricultural produce market committee (APMC) act.

Jain: Neither Sushma Swaraj nor Arun Jaitley are talking about it, certainly Mulayam Singh Yadav is not talking about it.

Q: If this goes horribly wrong for the government then it puts into jeopardy FDI in insurance, pension and if this goes through then it is good news for the other FDI-related reforms insurance and pension. If this were to go against the government do you believe that we are actually going to see another crisis just when confidence seem to be returning to the Indian markets and to the investment community do you believe that this is going to be a huge setback?

Bahl: I believe it is going to be a huge setback in more ways than one. They have now announced a policy. They went back on it, reinstated the policy, and changed the law. This will be probably the first time ever that in economic law has actually been rejected and it is not that sensitive.

Q: When was the last time we ever heard of a FEMA notification and amendment being discussed on the floor of the House or being challenged?

Jain: That's progression.

Bahl: That's an irony. So you can buy a Mont Blanc pen, an imported car. You can wear imported watches, but buying Indian goods from an Indian store is bad because there is foreign investment included. To me it sounds absolutely bizarre.

Q: Do you believe it will go through?

Bahl: I sincerely hope it does. I saw the criticism on the floor today and the question is can they dig themselves out? Can they even abstain having been so strident in their criticism. Mulayam Singh advised the government to wait for two years.

Q: Wait for two years, put it back in bids?

Jain: We will not align with communal forces. That was the escape route.

Watch videos to know Business Standard editor, AK Bhattacharya's view on FDI in retail.