By Priya Kumari
The Indian government has rejected Apple’s demand for special concessions in a bid to create a level playing field. The possible consequences of FDI in retail remains a larger question.
Single brand retail trading refers to the selling of products under one brand name. As per the report issued by the Department of Industrial Policy and Promotion (DIPP), the Government of India has allowed 100% Foreign Direct Investment (FDI) in this category, albeit with regulated sourcing criteria. Companies must source 30% of the value of goods purchased from Indian sources. Single brands like Apple, Ikea and Nike can now sell their products through e-commerce, provided they have a brick-and-mortar outlet in India. This is a welcomed move since they earlier had to rely on external marketplaces like Flipkart to sell their products in India, which forced them to negotiate on pricing and transaction charges.
Apple’s attempt to cater to the Indian market
Apple’s CEO Tim Cook visited India in May last year and has shown interest in manufacturing iPhones in India. However, this comes with a bundle of additional requests on sourcing and taxation. Earlier, Apple had asked for being permanently exempted from the 30% local sourcing rules citing that it is impossible for the “state-of-the-art” and “cutting edge” products it makes. However, the government has relaxed these rules for just three years from the commencement of business for single brand retail trades. Apple’s proposal to import and sell refurbished phones in India has been clearly rejected. Moreover, Apple’s request for tax concessions in form of lower import and manufacturing duties to open stores in India has been rejected.
Is FDI good for the Indian economy?
FDI plays an indispensable role in strengthening the economic backbone. It creates job opportunities in India and norms to encourage local sourcing further add to that objective. For optimizing the process of making and selling, foreign investors play a significant role in creating and improving infrastructure. Like a case of cultural intermixing, it is an opportunity to bring cutting-edge technology to the country. This further makes products available for the Indian consumers at a reduced price. By introducing advanced processing and management competencies, FDI fuels competition which forces local firms to increase efficiency.
However, if allowed to go unregulated, FDI poses serious threats to an economy. Some fraction of jobs should be restricted for the local youth while ensuring that it does not merely translate to acquisition of cheap labour. Leveraging their professional approach, they should be encouraged to set up training centres for the local workforce they employ. Multinational giants need to be regulated away from monopolist tendencies. FDI stems from deep pockets which shouldn’t be allowed to prey on small enterprises.
The case for regulation in FDI policy
Although the government invites foreign investment to propel the Make in India initiative, Apple’s case exemplifies its intention of protecting domestic interests simultaneously. Granting special tax concessions to Apple would be unfair to domestic competitors. In the short term, denying special status to Apple is unlikely to deter them from setting up stores in India. iPhone sales are slowing in the US and China. Moreover, Apple captures only 2% of the Indian smartphone market.
With increasing smartphone penetration, rising affordability levels and a massive population base, Apple is unlikely to budge to Indian regulations.
However, waiving the local supply constraints isn’t optimal. Foreign firms should involve domestic entities in the supply chain to strengthen both the economy and it’s technical competence. Small enterprises are usually suppliers to larger firms, and such deregulation is likely to hurt them. In the long term, the government’s stern approach is likely to prove beneficial for the broader Indian market. In the case of mobile phones, intermediaries do not add much value to products. Therefore, local manufacturing units, without intermediaries, will ensure easier access to world class products for Indian consumers.