DIPP to widen back-end infra’s definition

The committee of secretaries (CoS) has decided to enlarge the definition of back-end infrastructure for the proposed Foreign Direct Investment (FDI) in multi brand retail, which allow big international retail companies to open their stores in India.

The CoS has asked the department of industrial policy and promotion (DIPP) to work out the definition and include three new areas as a part of back end infrastructure investment. The three new areas are design improvement, quality control and packaging of products. Earlier the definition mainly comprised investment in logistic and procession of agriculture goods. 

The expansion of the back-end infrastructure will give greater flexibility to the foreign investors for structuring their investment in the retail sector. After the intense debate over the issue, the CoS has reached to the agreement that one of the key conditions for allowing FDI up to 51% in Multi-brand retail will be that minimum of 50 of their investment has to be compulsorily in the back-end infrastructure. 

The recommended policy, which has been sent to cabinet for the final call, had set the minimum for investment in the retail sector is set to be around $100 million. The DIPP’s decision of including design improvement was in the line to the recommendation of the ministry of micro, small and medium enterprises. The ministry of micro, small and medium enterprises has suggested that the foreign retailers must invest a small percentage of their profit, such as 1%, in design improvement, developing quality control mechanism and creating innovations in packaging for their small-scale suppliers.

The DIPP has agreed to include the recommendation and indicated it would be included in the definition of back end infrastructure to incentivize big retailers to investment. However, the DIPP is still in discussion, whether it should made compulsory and certain percentage of profit fixed for it. In order to provide more flexibility to foreign investors, the DIPP is also discussion on the issue of the investment in back end infrastructure by the foreign investors or by a different company on behalf of the investors.  

Many different government departments are having intense debate over the issue of inclusion of this clause, the department of economic affairs under the finance ministry has strongly opposed this clause, arguing that there would be many commodities for which 50% back end infrastructure may not be needed. The ministry of statistics and programme implementation is in support of ministry of Finance’s view.  It has made argument that such limitation should not be laid because retailers would make such investments in any case to run their business successfully. 

However, the department of consumer affairs is in support with the clause and it want to increase the limitation to the more than 75% from 50% for investment in back end infrastructure. It has recommended that the FDI in working capital should not be allowed. However, the DIPP rejected the recommendation of the department of consumer affairs stating it to be unreasonable. Money being fungible, distinguishing between capital expenditure and working capital would be a problem, DIPP said

The Reserve Bank of India argued that in the current working condition, data of investment were collected only for balance of payments purposes and post investment monitoring was not undertaken. Therefore, the RBI would not be in position to monitor compliance of the back-end investment clause. Hence, it was decided that foreign investors must be self-certify compliance with the condition and keep records so that the government can check.