It is time India changes the narratives of its FDI policy

< lang="EN-GB">Shopping space in India has considerably changed over the last decade. It is now not uncommon to pass through Zara (Spanish), G Star Raw (Dutch), Jo Malone London (British), Muji (Japanese), and many more single brand independent retail outlets whose origin can be traced from outside the Indian borders. From luxurious handbags to designer apparels to eccentric fragrances, the accessibility of it all would only have been a dream for a growing brand conscious India. The government has made significant progress in liberalising the single-brand retail FDI policy. Yet, the progress in the multi-brand retail segment remains restrictive. Subject to several conditions, multi-brand retailers are permitted to enter India, only through government route with investment capped at 51%. < lang="EN-GB">Is India benefiting or losing out because of a reserved multi-brand retail FDI policy? < lang="EN-GB">International evidence suggests that countries have benefited from the presence of foreign multi-brand retailers within their national borders. For example, the growing presence of and increased exposure to multinational retailers -- Wal-Mart, Metro, Carrefour, Tesco -- in China enhanced general exporting capabilities of Chinese cities where the stores were located such that city retail exports rose to all countries and not just to retailers headquarters countries. In Romania, expansion of foreign retail chains led to productivity improvements in the food supplying industries of regions where the foreign retail outlets were located. Wal-Mart's entry in Mexico triggered heterogeneous responses from Mexican-suppliers of merchandise and food. Wal-Mart's demand of quality-adjusted lower prices and the need to continually innovate, on the one hand, pushed down mark-ups and marginalised less capable producers. On the other hand, Wal-Mart’s retailing power helped productive firms to expand their market shares and boost productivity. A similar transformation was observed amongst Mexican retailers where increased competition from Wal-Mart's entry lead to market share re-allocations in favour of those Mexican-retailers that responded to competition by introducing innovative changes and improved functional efficiency. In addition, Wal-Mart's entry also brought fundamental changes in the Mexican retail sector itself - it modernized the sector by introducing newer business practises including warehousing, distribution, and inventory management techniques. < lang="EN-GB">Acknowledging that much of the available evidences are not exclusive to multi-brand foreign retailers following the business to consumer model, a segment where India's reservation lies. Nevertheless, the underlying conclusion that knowledge brought in by multinationals, even though kept secret, gradually leaks and eventually becomes a common knowledge in the market in which both multinational and domestic firms alike operate, cannot be refuted. Multinationals serve as knowledge banks, where knowledge can be related to product and processes, distribution and marketing; and this knowledge can spill over to domestic firms. < lang="EN-GB">The existence and magnitude of these spillovers, however, depends on the capability (or absorptive capacity) of the domestic economy. This is because knowledge diffusion is not automatic: domestic firms should have the capability to absorb - adopt and adapt- such knowledge. For example, the fact that Wal-Mart’s entry favoured the productive Mexican- firms (retailers and suppliers) who were able to accommodate to changes in market dynamics, indicates the importance of absorptive capacity. Enabling a strong domestic absorptive capacity moderates the technological gap between foreign and domestic firms thereby increasing the probability of greater technological diffusion. < lang="EN-GB">Policy prescription < lang="EN-GB">Country dynamics differ -- what may have been beneficial for China, Romania and Mexico, may not necessarily prove beneficial for India. Yet, the discussion that knowledge spillovers from multi-brand foreign retailers can raise domestic productivity through technological diffusion, cannot and should not be ignored. India needs to internalise such discussions, and for the good of the country, take the bull by its horn. < lang="EN-GB">Indian government has been smug arguing that FDI inflows have increased because of liberalising FDI policies. However, liberalisation is not enough. It may very well be the first step. India, as a country, needs to go further than that. There is a need to design and implement policies that builds India’s absorptive capacity (firm and country/regional level). Absorptive capacity at the firm-level is usually associated with, for example, domestic firms’ research and development activities; whereas at the country/regional-level, it is associated with, for example, the quality of available human capital or level of financial development. Both, micro and macro, factors can feed into each other and facilitate the occurrence of FDI spillovers – for instance, a developed financial system can alleviate financial frictions enabling domestic firms to invest in capacities for assimilating knowledge brought in by multinationals. < lang="EN-GB">The government needs to recognise that spillovers from FDI are realised only if domestic firms have the ability to absorb foreign technologies and skills. Besides, domestic absorptive capacity also dictates the technological level FDI brings with itself. Building domestic capacities is ever more important to sustain and survive challenges brought in from liberalizing FDI policies. < lang="EN-GB">Resorting to protectionist policies through strangling demands in the name of domestic industry development is ineffective. It not only starves consumers of choices but also steals opportunities off from producers and a nation from growth through technological advancement. Instead, India must invest in itself empowering market players to deal with the direct and indirect consequences from liberalization. < lang="EN-GB">It is about time, India changes the narrative of its FDI policy.

• Indian Economy
• India
• FDI
• Walmart

The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.