What positive impact can result from foreign direct investment in India's retail sector?

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kipling2448 | (Level 3) Educator Emeritus

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Foreign direct investment in India’s retail sector could provide the same economic benefits as it does when directed at other countries, but for the fact that India is considered an inhospitable climate for such investments. 

Only the most politically and socially isolated countries eschew foreign direct investment, as the introduction of foreign business concepts and practices, with the accompanying foreign presence it inevitably entails, is seen as threatening to those countries’ ability to maintain firm control over all economic and political activities within their borders.  North Korea, for example, allows some levels of foreign investment in its capital of Pyongyang, but those activities are kept as low-key as possible lest the local population begin to discover exactly how isolated it is from the rest of the world.  India does not fall into that category, but it has sought to protect domestic industries by establishing structural and cultural impediments to increased foreign investment.  A recent interview with a prominent Indian businessman quotes him as making the following observations regarding India’s business climate:

“It is not on the radar of multinationals.  The global CEOs tell me India first needs to sort its issues out.  The trouble is, in India, everything is grey, nothing is black and white,” Mr. Parekh says referring to the lack of transparency in taxation and FDI or foreign direct investment policies.  He says India needs to provide clarity and transparency in policies to attract foreign investment.  “Global investors don’t know how long approvals will take – one month or one year.” [“India Being Bypassed as an Investment Destination: Deepak Parekh,” NDTV, October 2, 2013]

Should India’s government decide to prioritize foreign direct investment, it will need to pass the kinds of laws and regulations needed to attract foreign corporations.  The above quote is not an aberration.  Foreign direct investment in India has declined significantly just over the past year by 38 percent, due overwhelmingly to the country’s failure to establish the legal framework that foreign businesses require before investing hundreds of millions or billions of dollars there.  Statutory limits on the amount foreign corporations can invest in any one particular industry, again, imposed for the purpose of protecting domestic industry from foreign competition, has resulted in major reversals by many foreign companies previously anxious to enter the growing Indian market. [See “Policies on FDI, taxes have undermined India’s Image: Sanofi Chief,” Live Mint & The Wall Street Journal, October 3, 2013]

Should India elect to make itself more open to foreign direct investment, its retail sector would likely improve dramatically.  The increased availability of higher quality goods combined with the employment opportunities such investment would create would combine to facilitate considerable growth in India’s economy through a more vibrant retail industry.  But, first, it has to open its arms to foreign investments within the parameters established by the World Trade Organization, of which India is a member.  In fact, India’s structural obstacles to foreign direct investment will make it the target of trade disputes before the WTO’s dispute settlement process.

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