A Closer Look at FDI Flip-flopping in India

Last month, the new Delhi government—led by the upstart Aam Aadmi Party—sent a letter to the federal government mere days after taking office notifying it of their decision to rescind a relatively new policy allowing foreign direct investment (FDI) in the multi-brand retail sector (department or big-box stores selling more than one brand). I wrote about this at the time, noting that a sudden flip-flop on allowing FDI would send a “confusing, conflicted signal” to potential investors.

On Friday, the new Bharatiya Janata Party (BJP)-led government of Rajasthan followed suit, sending their own letter to the federal government seeking a similar roll-back on permission for FDI in multi-brand retail. The state of Rajasthan had been led by the Congress party for the last five years until elections in December 2013 brought the BJP back to power in the state. Once again, we can’t say it’s any surprise that a BJP-led Rajasthan would move to end FDI in retail in the state, since it is no secret that the BJP has publicly opposed it.

These two cases raise larger questions about federalism and foreign economic policy. As noted in my previous post, given the contentious debate in India about the costs and benefits of allowing FDI in multi-brand retail, and given that the United Progressive Alliance government’s first effort to open it resulted in the loss of a coalition ally in 2011, the policy which resulted in 2012 created a national framework allowing up to 51 percent FDI, but left decisionmaking in the hands of individual states on whether to say yes or no. Foreign investment policies are the responsibility of the federal government, but retail is a subject overseen at the state level, so the opt-in policy appeared to meet both halfway, doing so in a politically feasible way by deferring to the individual states.

The new retail FDI guidelines (scroll to page two, and 2013 revisions here), are detailed and comprehensively seek to cushion any perceived negative impact of large foreign investors by directing their investment to India’s development needs. Investors would be required to commit quite deeply to the Indian economy, with $100 million infused over a three-year period, split equally between “front-end” and “back-end,” to deliver the supply chain infrastructure of great interest to so many in India, and would further need to source at least 30 percent of all products from “small industries” in India. An investor that manages to develop an approach to the complex Indian market meeting all of these requirements would demonstrate great interest and significant investment, indeed.

Except a flip-flop is a confounding new wrinkle altogether. The Delhi rescission letter, according to press reports, caused the commerce and industry ministry, which oversees investment policy, to “seek an expert and legal view” from the federal law ministry on whether an opted-in state could reverse itself and opt-out. The Rajasthan decision now gives Delhi company, and makes this more than an isolated phenomenon. As Business Standard put it, “Can yes to FDI become a no?” The business community in India certainly seems alarmed, with statements noting their concern for investor confidence. On February 1, the Associated Chambers of Commerce and Industry of India, made a fresh public statement on the Rajasthan rollback: “Once a stand is taken, there should be no room for reversal.”

Now for the political risk part, otherwise known as the anti-incumbency factor. Political scientists use this term to refer to the general tendency in India for voters to kick out incumbents at the ballot box, quite unlike the “incumbent advantage” taken for granted in the United States. (One scholar notes that incumbency becomes a “penalty” after two years in office). It’s certainly true that the anti-incumbency factor has been less pronounced over the last decade or so—some notable chief ministers have been rewarded with multiple terms in office for good governance and service delivery, including Gujarat’s Narendra Modi (three terms), former Delhi chief minister Sheila Dikshit (three terms, but lost her own seat in 2013), Odisha’s Naveen Patnaik (three terms), and Bihar’s Nitish Kumar (three terms). But take a look at Rajasthan, and many other states in India, and the anti-incumbency trend still matters. In a country where the general tendency has been against continuity of party in office, a policy dependent upon the views of the state government of the day sounds like a surefire recipe for reversals.

There’s also the question of whether a new government at the center would seek to reverse the enabling framework allowing FDI in multi-brand. India heads for national elections some time in April, and a new government should form by the end of May. Would a BJP-led coalition at the center look to undo the retail FDI framework entirely, and if so, what of the states which had opted-in when it was permitted? It seems likely that a reversal at the center would override previous policy to become the new law of the land—putting an end to the “enabling” framework.

Retail and foreign investment takes up little debate in other parts of the world, but these new state level reversals reveal how divisive the topic remains in India. Many will be watching for the law ministry’s opinion on whether a state can reverse itself once agreed to a policy. But regardless of that answer, on an issue so heavily politicized, it looks more like politics will trump policy.

Follow me on Twitter: @AyresAlyssa