Cover Page of FDI Report

REPORT NO. 250

DEPARTMENT-RELATED PARLIAMENTARY STANDING COMMITTEE ON INDUSTRY

TWO HUNDRED AND FIFTIETH REPORT ON IMPACT OF FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-BRAND RETAIL ON MSME SECTOR PERTAINING TO THE MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES

(PRESENTED TO THE HON’BLE CHAIRMAN, RAJYA SABHA ON 23.07.2013) (FORWARDED TO THE HON’BLE SPEAKER, LOK SABHA ON 23.07.2013) (PRESENTED TO RAJYA SABHA ON 06.08.2013) (LAID ON THE TABLE OF LOK SABHA ON 06.08.2013 )

Rajya Sabha Secretariat, New Delhi July, 2013/Ashadha, 1935 (Saka)

PARLIAMENT OF INDIA RAJYA SABHA

DEPARTMENT-RELATED PARLIAMENTARY STANDING COMMITTEE ON INDUSTRY

TWO HUNDRED AND FIFTIETH REPORT ON IMPACT OF FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-BRAND RETAIL ON MSME SECTOR PERTAINING TO THE MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES

Rajya Sabha Secretariat, New Delhi July, 2013/Ashadha, 1935 (Saka)

C O N T E N T S

PAGES

1. COMPOSITION OF THE COMMITTEE ………………………………………… ( i )

2. INTRODUCTION ………………………………………………………………… (ii)

3. REPORT ……………………………………………………………………………

4. RECOMMENDATIONS/OBSERVATIONS OF THE COMMITTEE – AT A GLANCE……………………………………………………………………………

5. MINUTES…………………………………………………………………………..

COMPOSITION OF THE COMMITTEE (CONSTITUTED W.E.F. 31 ST AUGUST, 2012)

RAJYA SABHA

1. Shri Tiruchi Siva — Chairman 2. Shri Narendra Budania 3. Shri Ashk Ali Tak 4. Shri Ananda Bhaskar Rapolu 5. Shri Natuji Halaji Thakor 6. Shri Basawaraj Patil 7. Prof. S. P. Singh Baghel 8. Shri Vivek Gupta 9. Shri Nandamuri Harikrishna 10. Shri M.P. Achuthan

LOK SABHA

11. Dr. Rattan Singh Ajnala 12. Shri Khiladi Lal Bairwa 13. Shri N.S.V. Chitthan 14. Smt. Poonamben Veljibhai Jat 15. Shri Ram Singh Kaswan 16. Shri Hassan Khan 17. Shri Kaushalendra Kumar 18. Shrimati Ingrid Mcleod 19. Shri Bharat Ram Meghwal 20. Shri Somen Mitra 21. Shri P.R. Natrajan 22. Shri Gorakhnath Pandey 23. Shri Jayaram Pangi 24. Shri R. K. Singh Patel 25. Shri B. Y. Raghavendra 26. Shri Gopal Singh Shekhawat 27. Shri Ijyaraj Singh 28. Ch. Lal Singh 29. Shri Kirit Premjibhai Solanki 30. Shri E.G. Sugavanam 31. Shri Ramsinh Rathwa

SECRETARIAT

1. Shri S.N. Sahu, Joint Secretary 2. Smt. Sunita Sekaran, Director 3. Shri Roshan Lal, Joint Director 4. Shri Ranjan Chaturvedi, Assistant Director

(i)

INTRODUCTION

I, the Chairman of the Department-related Parliamentary Standing Committee on Industry, having been authorized by the Committee, hereby present this Two Hundred and Fiftieth Report on impact of Foreign Direct Investment (FDI) in retail on MSME sector pertaining to Ministry of Micro, Small and Medium Enterprises.

2. The Committee heard the representatives of Ministry of Micro, Small and Medium Enterprises, Department of Industrial Policy & Promotion. The Committee also sought the views of public through Press-Release and heard representatives of select industry associations/experts on the issue.

3. The Committee in its meeting held on 22 nd July,2013 considered and adopted the report.

TIRUCHI SIVA Chairman Department -related Parliamentary Standing Committee on Industry

New Delhi, July, 2013

(ii)

REPORT

Foreign investment denotes investment made by a non-resident entity in an enterprise in the host country. This can happen through FDI (Foreign Direct Investment) and Foreign Portfolio Investment by FIIs (Foreign Institutional Investors) or private equity funds etc. The FDI denotes foreign capital with a longer term perspective and often invested in productive enterprise and may seek managerial control over enterprise. Of many other modes of getting external finance, FDI is preferred mode due to its long term stable nature. It is less volatile and does not generate or add to debt liabilities for the host country.

2. In order to discount unwarranted implications, in India the FDI flow is allowed either through Government route or automatic route. The sectors not included in automatic route need Government's approval and proposals are considered by inter-ministerial Foreign Investment Promotion Board under M/o Finance or Department of Industrial Policy and Promotion (DIPP). Sectors in which FDI is prohibited include lottery, chit fund, gambling/betting, agriculture and plantation.

3. In November, 2011 the Government of India decided to permit 51% foreign direct investment in the multi brand retail sector. The decision was deferred for want of broader consultation and discussion on the issue. Subsequently in September, 2012 the Government finally announced the decision through the press note no. 5 (2012 series). A minimum investment of US $ 100 million, is required to enter into multi-brand retail business, of which 50% will be in the back-end operations. The Back-end operations will not include investment in land, rental or front-end stores. Among other things the press note also mentioned:

“At least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian ‘small industries’ which have a total investment in plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a ‘small industry’ for this purpose. This procurement requirement would have to be met, in the first instance, as an average of five years’ total value of the manufactured/processed products purchased, beginning 1st April of the year during which the first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.”

The Policy further states:

"Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities; retail locations will be restricted to conforming areas as per the Mater/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking. In States/Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking."

4. The Committee decided to examine the impact of recent decision to allow 51% FDI in multi-brand retail, on the MSMEs. The Committee held meetings on the issue on 28th December, 2012, 14thMay, 2013 and 11th June, 2013, during which it interacted with representatives of Ministry of MSME, Department of Industrial Policy and Promotion and representatives of select industry associations and experts on the subject. The Committee also invited the views and opinion from public at large through an advertisement published in prominent national and regional dailies.

5. Regarding definition of small industry with investment of US $ 1 million in Plant and Machinery, the Committee took note of Budget declaration (2013-14) to extend non tax benefits for next three years after a unit graduates out of its category. The Committee was informed by the Secretary, DIPP that process of taking approval from competent authority to amend existing policy provision to align it with budget declaration, was under process.

6. The Committee was informed about the gradual evolution of the policy on FDI. It was informed that 100% FDI, through Government approval route, in wholesale trading was allowed since 1997. In 2006, the condition of Government approval was removed and FDI in wholesale sector was allowed through automatic route. Also in 2006, 51% FDI with Government approval was permitted in single brand retail trading. As per the recent policy decision of 2011, 100% FDI has been permitted in the single brand retail trading and 51% in the multi-brand retail trading, both subject to certain conditions.

7. It has been informed to the Committee that the FDI policy is covered under schedule I of the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulation 2000. And that the relevant provision under the recent policy decision has been notified under the said Regulation. Any violation of the condition prescribed in the extant policy will amount to violation of Foreign Exchange Management Act (FEMA) Regulation and the RBI and Enforcement Directorate could take necessary action. The Committee was also informed that any violation of FEMA provisions will involve penalties up to three times the sum involved in violation or up to Rs. 2 Lakh in case amount was the not quantifiable.

8. The Draft XII Plan document presents an optimistic scenario of FDI that “ Deeper pockets and technology, and the compulsions to invest in supply chain development which is not there for domestic modern retail may accelerate investment in logistics, quicken consolidation of retail trade and create new proprietary supply chains.”

9. Emphasizing the positive impact of FDI particularly multi-brand retail sector, the DIPP informed that the FDI will bring more investment in the economy that will benefit domestic companies. It will introduce new technologies, internationally accepted managerial practices and thereby facilitate gradual integration into global market. It was also informed that provision of 30% mandatory sourcing from small industries will encourage value addition in small scale manufacturing sector. This will link the domestic small industries with the global retail chains and will increase export from small scale sector.

10. However, the Committee also took note of the observation made by the PM's Task Force on MSME which noted that the past FDI policies did not result in substantial technology gains.

11. Keeping in mind the above observations of the PM's Task Force the Committee is of opinion that the FDI for retail may not have beneficial impact on the MSME sector. However the Committee suggests that the Government and more particularly the Ministry of MS&ME should commission a survey to assess the benefits and losses of previous FDI policies on the MSME sector to ascertain if FDI policy so far has created any back-end infrastructure, imparted skills to domestic manpower or upgraded managerial skills as has been envisaged in the recent policy.

12. In his submission before the Committee, the Secretary, DIPP, submitted that the domestic manufacturing sector is declining and uncompetitive and there is vast scope to increase the share of manufacturing sector in the country’s GDP so that more skilled work force could be incrementally absorbed in the manufacturing sector.

13. Responding to apprehensions of cheap imported goods flooding the domestic markets, the representative of DIPP tried to distinguish between the Trade Policy, which allowed cheap and liberal imports and the FDI policy. Referring to perception that FDI will open up floodgates for cheap imported goods that will doom domestic industries and retail, he informed that goods were still being imported and sold in retail market as per the extant trade policy. Therefore, he maintained that the FDI policy is an improvement upon existing policy of liberal imports.

"Today anybody can import the goods. He is importing it. Even in organized retail, there in no condition on the Indian organized retail. So here, there is a step forward that if these people come in, if they want to set up shops, they have to procure 30% from MSMEs."

14. The Industry associations said that in the era of WTO and Free Trade Agreements (FTAs) the trade will be liberalized. Therefore, domestic industry need to adopt new technologies, new business practices, skills and build up their competitive strengths to integrate into global chains.

15. The Committee feels that FDI Policy is an extension of liberal trade policy and that the two have hardly any substantial differences. The Committee, therefore, does not accept the so called nuanced distinction outlined before it. It is of the view that not enough safeguards have been provided for to insulate the SME sector from sudden changes in trade policy. In view of this the Committee is quite apprehensive of the constructive and beneficial impact of the FDI policy on the MSME sector.

16. The Committee notes that in the available literature the optimistic projections on organized retail sector have been outlined. According to one estimate till 2006 only 4% of retail business in the country, was done through organized retail. Another study suggests that India’s retail business was likely to reach US $ 1 trillion by 2016 at an impressive annual growth rate of 13%.

17. The background note of the DIPP also referred to the study commissioned by the Government of India through Indian Council for Research on International Economic Relations (ICREIR), entitled “ Impact of Organized retailing on the unorganized Sector” ( 2008). It referred to independent industry estimates and studies on the subject and observed that organized retail will create quality labour class at graduate and tenth plus levels by providing vocational training and skills to them. As such it will enhance the potential of Indian economy including the small scale manufacturing sector, food processing, textiles and apparels, construction, IT, transport, cold chain and other infrastructure. It will replace low-end, low quality, underproductive jobs with high end and high skill jobs.

18. As per the estimates of the study 1.7 million direct jobs are expected to be created in the front end and back end operations in next five years, with majority of jobs being created in front-end operations. The study is optimistic that many more indirect jobs would be created in organized retail.

19. The Committee notes the optimistic estimates given in the study made by ICRIER on behalf of Government. However, the figures on which study is based, need to be validated. The Committee finds this arrangement rather strange where Government commissions a study with an independent research body which in turn depends on another non-Government source for data and estimates. The Government should ascertain the methodology of study and validate the estimates and figures, before taking such a major policy decision on the basis of this study.

20. Another significant point is that as per the study estimates majority of jobs will be created in front end operations, whereas the Government is emphasizing on the integration of small industries in the back-end supply chains. There is no clarity regarding employment potential of front end and back end operations. From Policy it appears that 30% sourcing will be calculated on the basis of annual front-end procurement. The Committee notes that the Ministry of MSME seeks back-end integration of small industries whereas, studies project maximum scope of job creation only in the front-end operations.

21. In addition to the study by ICRIER, the policy has also been supported by certain industry associations. The Committee was informed of the industry estimates based on a survey of different classes of SMEs and taking into account their turnover. The survey concluded that 48% of the respondents were of opinion that the FDI in retail would have positive impact on employment and only 16% opined that it will have negative impact on employment in SME sector, with 35% saying that FDI will have no impact on employment in SME. Another study done by a private Bank too, projected 1.7 million jobs being created in 5 years, majority of them being in the front-end operations.

22. The Committee takes cognizance of several studies done by industry bodies and refers to study note provided by the DIPP, in support of prospective benefits which FDI in multi-brand retail may bring. However, the Committee suggests that the Ministries of MS&ME and DIPP should have done a study on impact of FDI in single brand retail and wholesale sectors in the MSME segment and the same could have been factored into the recent policy.

23. In the written submission made by the DIPP, it is stated that certain challenges still exist before MSMEs are integrated into the supply chains. The MSMEs need to adopt and upgrade the existing practices in areas likes designing, packaging, technology, efficient manufacturing, bar coding, IT systems, quality management, ISO certification and skill development.

24 . The Committee while acknowledging the importance of these issues feels that adoption of these systems will increase the costs of MSME products. The Committee suggests that existing schemes of M/o MS&ME for skill training, quality certification, packaging must be upgraded and strengthened keeping in view the emerging requirements for mandatory procurement from MSE sector under FDI retail scheme. In fact the Committee feels that FDI in retail may not benefit the retail sector unless designing, packaging, bar coding, skill development, etc., are improved upon and integrated into supply chain. To achieve these objectives increased budgetary allocation under the appropriate schemes would be required.

25. The Committee also raised issue of confining the 30% sourcing condition only to "Small Industries" with an investment if US $ 1 million in Plant and Machineries, while excluding other enterprises. The Secretary, DIPP informed that it was a conscious decision to promote the manufacturing sector. He also informed that within the definition of small industry, the micro sector was also included. This explanation of DIPP is not acceptable because micro sector has to be given separate identity to keep it insulated.

26. The Committee would like the MSME Ministry to be more vigilant to see that micro enterprises would not be excluded due to conservative interpretation of "Small Industries" in policy. The Committee also feels that the while focus on "Small Industries" is intended to encourage manufacturing sector, local "Small Enterprises" including the local service providers like IT service, Transporters, Technicians etc. too should get the benefits of this Policy.

27. The Committee also takes note of the provision which states "in States/Union Territories not having cities with population of more than ten lakh as per 2011 census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities". This provision is open to interpretation. It may allow the mega retail outlets even in or around smaller cities which have been consciously excluded in the provision.

28. Upon a query, if the foreign retail players could source their procurement from State which has not allow FDI in multi-brand retail trade, the Secretary, DIPP informed Committee that embargo was only on the front end operations and not on the back end procurements.

29. The Committee apprehends that the above provision of putting an embargo only on front end operations and not on back end procurements would enable entry of Foreign Direct Investors to all the States of our Union which is not the express intent of the policy. The Committee notes that the policy was only an enabling provision and that it left the respective States to take decision for allowing the FDI in multi-brand retail trade. Therefore, there is a need to clarify the issue of back end operations in the policy itself. The Committee also feels that such provisions may be misused to create internecine competition among the inter-State small industries.

30. For wider consultations on FDI in retail policy the Committee interacted with the representatives of select associations and experts who had submitted memoranda to the Committee in response to its advertisement seeking opinion from public.

31. There was an apprehension regarding impact of FDI on the small industries during the first five years when the 30% annual sourcing norms will not be applicable. The associations apprehended that predatory practices during the first five year may imperil the survival of small industries.

32 . The Committee also found the condition of self-certification in respect of 30% sourcing norm, not helpful to the MSME sector. In absence of any previous survey on impact of FDI on the SSI sector in the country, the Committee feels that the implementation of policy provision should be closely monitored through an institutional mechanism in the initial year and must not be left to self-certification. The Committee also suggests that the auditor should specifically certify the adherence to the 30% sourcing norm and it must be mentioned in the audited report of the companies which would invest under FDI in retail scheme. These provisions should be provided in the relevant FEMA Regulations itself.

33. Another issue raised pertained to quantifying the 30% procurement. There was a demand that 30% procurement should be item-wise instead of on the basis of total annual procurement. There was apprehension that any ambivalence may deny SSIs, the proposed advantages of the Policy and instead may be used against the interests of SSIs.

34. The Committee took serious note of the apprehensions. The representative of the DIPP too agreed to take note of the apprehensions. The Committee recommends that 30% sourcing norms should be applicable item-wise.

35. Many associations also stated that difficulties would arise in aligning business model and structure of SSIs with the requirements of big retail business which require standardized products at massive scale. These standards set by the retails chains can at times be misused and jeopardize the small industry leading to extinction of small retail shops. It was also informed that in case a single SSI unit is not able to supply, multiple suppliers may not be able to adhere to standardized specifications.

36. There was also apprehension that the 'quality' and 'standard' may become tools to exclude SSIs from supplying to Mega retails stores. In this regard, the Secretary, M/O MSME submitted that quality and standard issue may create adverse situation for MSMEs. He informed that if stringent quality standards are applied, it may adversely impact domestic SSIs too and if no standard norms are fixed, the local market is glutted with cheap imports from China, as has been the case with Toys. The Secretary, M/o MSME further added, "For most of the products, the standards in our country are not mandatory. In fact, that is the problem which the MSMEs has been facing when it comes to imported products entering the Indian market. Since the standards are not mandatory, the issue that arises is that if we make it mandatory, it will also hit the MSMEs."

37. The Committee was also informed that the companies which were permitted in the wholesale business, were also digressing into retail business through clandestine methods in States like Tamil Nadu which had not allowed FDI in multi-brand retail. Upon enquiring, the representative of DIPP informed that while FDI in wholesale was allowed since 2006, there was no institutional mechanism to monitor digression to retail trade. The representative of the DIPP said:

"At the Government of India level, we do not have a formal mechanism. But, if there are complaints then they are looked into."

38. In this respect the Committee takes cognizance of the observations and recommendations made in the 90th Report of the Department related Parliamentary Standing Committee on Commerce on the issue “Foreign and Domestic Investment in retail sector” (2009), wherein it is observed that: “The Committee are also of the view that allowing cash and carry wholesale in India is nothing but allowing backdoor entry of foreign companies into retailing …” “Government should stop issuing further licenses for ‘cash and carry’, either to the transnational retailers or to a combination of transnational retailers and the Indian partner, as it is mere a camouflage for doing retail trade through back door.”

39. The Committee emphasises the need for setting up an institutional mechanism like a Retail Regulatory Authority.

40 . The Committee also takes note of lack of efficient and adequate monitoring mechanism to enforce policy provisions and to discount violations. In such a scenario, leaving adherence of policy provisions solely to self-certification, would be self defeating.

41. The representative of M/o MSME informed the Committee about lax monitoring standards in the country against cheap imports. He informed that under the WTO regime, there were three institutional safeguards available, namely: safeguard against dumping, mechanism located in the office of Director General, Foreign Trade and another at the Customs Office. However, such mechanism has not been efficiently used due to complex procedures and limited capacities of SSI entrepreneurs to pursue the cases of violation.

42. The representatives M/o MSME confirmed that the Ministry would be very much interested in the backward operations, but cautioned against any dilution in provisions. He cautioned by saying,

"We are very interested in the back-end operations. Those back-end operations, through any clarification, must not be diluted, that money must be invested."

43. The Committee finds that there are still some areas, where details need to be elaborated and modified in interest of MSMEs. The Committee finds that notwithstanding study reports, a major section of industry associations and experts were apprehensive of FDI Policy, its provisions and their implementation in absence of detailed norms and monitoring mechanism. As such, the Committee has serious reservations over the prescribed Self-certification norms. The Committee recommends that auditors must specifically certify the adherence of sourcing norms by the retail companies. The Committee recommends that M/o MSME should conduct regular survey of MSMEs to monitor sickness/takeovers/mergers and other trends.

44. The Committee noted that on one hand there were optimistic estimates given in the available literature on the subject which are largely shared by the Government and Planning Commission. The witnesses of various associations who appeared before the Committee emphasised very clearly the following points:

Initially the game plan of foreign big retail giants would be to attract the customers from the indigenous retail shops by offering low prices. In doing so they would completely eliminate our retailers and create a situation where they would have monopoly over retail trade. Later they would sell the same goods at an unreasonably higher price which the consumers would be forced to buy in absence of any other option available to them. Their continuing dominance and their direct dealings with farmers by giving attractive prices in the beginning would cripple our Mandis and markets which form part of our rural economy. Once such Manids are eliminated the big foreign retail giants would manipulate prices and our farmers would be forced to sell their products at a low price dictated by them. Our own squeezed out retailers and all those associated with the markets and retail trade would lose their livelihood and become jobless. It would add to our already existing social and economic woes which generates so much unrest and violence.

45 . The Committee therefore, is of the view that an institutional monitoring mechanism is essential to remove any unwarranted consequences of this policy. The Committee concurs with the recommendation of the Parliamentary Committee on Commerce in this respect, which suggested that “there is a need for setting up of a Retail Regulatory Authority, to look into the problems and act as a whistle blower, in case of anti competitive behaviour and abuse of dominance.”

46. The Committee is also cognizant of the recent media reports suggesting that the expected investment in multi-brand retail has not come yet and the retails companies are negotiating with the Government to dilute sourcing norms. The Committee cautions against any such dilutions. Any consultation in respect of FDI and its likely impact on SME sector, must mandatorily involve Ministry of MSME. The Committee also recommends that National Board on MSME, as statutory advisory body must take up the issue of impact of FTAs, Trade Policy and the FDI on MSME sector for its study and present its recommendations periodically. Any new clarification on the policy must be discussed in the Board. The Committee feels that without efficient regulatory frame work, this policy will not give intended benefits to the MSME sector, instead it may imperil its very survival.

Recommendation/observation at a glance

1. Keeping in mind the above observations of the PM's Task Force the Committee is of opinion that the FDI for retail may not have beneficial impact on the MSME sector. However the Committee suggests that the Government and more particularly the Ministry of MS&ME should commission a survey to assess the benefits and losses of previous FDI policies on the MSME sector to ascertain if FDI policy so far has created any back-end infrastructure, imparted skills to domestic manpower or upgraded managerial skills as has been envisaged in the recent policy. (Para 11) 2. The Committee feels that FDI Policy is an extension of liberal trade policy and that the two have hardly any substantial differences. The Committee, therefore, does not accept the so called nuanced distinction outlined before it. It is of the view that not enough safeguards have been provided for to insulate the SME sector from sudden changes in trade policy. In view of this the Committee is quite apprehensive of the constructive and beneficial impact of the FDI policy on the MSME sector. (Para 15) 3. The Committee notes the optimistic estimates given in the study made by ICRIER on behalf of Government. However, the figures on which study is based, need to be validated. The Committee finds this arrangement rather strange where Government commissions a study with an independent research body which in turn depends on another non-Government source for data and estimates. The Government should ascertain the methodology of study and validate the estimates and figures, before taking such a major policy decision on the basis of this study. (Para 19) 4. Another significant point is that as per the study estimates majority of jobs will be created in front end operations, whereas the Government is emphasizing on the integration of small industries in the back-end supply chains. There is no clarity regarding employment potential of front end and back end operations. From Policy it appears that 30% sourcing will be calculated on the basis of annual front-end procurement. The Committee notes that the Ministry of MSME seeks back-end integration of small industries whereas, studies project maximum scope of job creation only in the front-end operations. (Para 20) 5. The Committee takes cognizance of several studies done by industry bodies and refers to study note provided by the DIPP, in support of prospective benefits which FDI in multi-brand retail may bring. However, the Committee suggests that the Ministries of MS&ME and DIPP should have done a study on impact of FDI in single brand retail and wholesale sectors in the MSME segment and the same could have been factored into the recent policy.

(Para 22) 6. The Committee while acknowledging the importance of these issues feels that adoption of these systems will increase the costs of MSME products. The Committee suggests that existing schemes of M/o MS&ME for skill training, quality certification, packaging must be upgraded and strengthened keeping in view the emerging requirements for mandatory procurement from MSE sector under FDI retail scheme. In fact the Committee feels that FDI in retail may not benefit the retail sector unless designing, packaging, bar coding, skill development, etc., are improved upon and integrated into supply chain. To achieve these objectives increased budgetary allocation under the appropriate schemes would be required. (Para 24)

7. The Committee would like the MSME Ministry to be more vigilant to see that micro enterprises would not be excluded due to conservative interpretation of "Small Industries" in policy. The Committee also feels that the while focus on "Small Industries" is intended to encourage manufacturing sector, local "Small Enterprises" including the local service providers like IT service, Transporters, Technicians etc. too should get the benefits of this Policy.

(Para 26) 8. The Committee also takes note of the provision which states "in States/Union Territories not having cities with population of more than ten lakh as per 2011 census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities". This provision is open to interpretation. It may allow the mega retail outlets even in or around smaller cities which have been consciously excluded in the provision.

(Para 27)

9. The Committee apprehends that the above provision of putting an embargo only on front end operations and not on back end procurements would enable entry of Foreign Direct Investors to all the States of our Union which is not the express intent of the policy. The Committee notes that the policy was only an enabling provision and that it left the respective States to take decision for allowing the FDI in multi-brand retail trade. Therefore, there is a need to clarify the issue of back end operations in the policy itself. The Committee also feels that such provisions may be misused to create internecine competition among the inter-State small industries. (Para 29)

10 . In absence of any previous survey on impact of FDI on the SSI sector in the country, the Committee feels that the implementation of policy provision should be closely monitored through an institutional mechanism in the initial year and must not be left to self- certification. The Committee also suggests that the auditor should specifically certify the adherence to the 30% sourcing norm and it must be mentioned in the audited report of the companies which would invest under FDI in retail scheme. These provisions should be provided in the relevant FEMA Regulations itself. (Para 32) 11. The Committee took serious note of the apprehensions. The representative of the DIPP too agreed to take note of the apprehensions. The Committee recommends that 30% sourcing norms should be applicable item-wise.

(Para 34) 12. The Committee emphasises the need for setting up an institutional mechanism like a Retail Regulatory Authority. (Para 39)

13 . The Committee also takes note of lack of efficient and adequate monitoring mechanism to enforce policy provisions and to discount violations. In such a scenario, leaving adherence of policy provisions solely to self-certification, would be self defeating. (Para 40) 14. The Committee finds that there are still some areas, where details need to be elaborated and modified in interest of MSMEs. The Committee finds that notwithstanding study reports, a major section of industry associations and experts were apprehensive of FDI Policy, its provisions and their implementation in absence of detailed norms and monitoring mechanism. As such, the Committee has serious reservations over the prescribed Self-certification norms. The Committee recommends that auditors must specifically certify the adherence of sourcing norms by the retail companies. The Committee recommends that M/o MSME should conduct regular survey of MSMEs to monitor sickness/takeovers/mergers and other trends.

(Para 43)

15. Initially the game plan of foreign big retail giants would be to attract the customers from the indigenous retail shops by offering low prices. In doing so they will completely eliminate our retailers and create a situation where they will have monopoly over retail trade. Later they will sell the same goods at an unreasonably higher price which the consumers would be forced to buy in absence of any other option available to them. Their continuing dominance and their direct dealings with farmers by giving attractive prices in the beginning will cripple our Mandis and markets which form part of our rural economy. Once such Manids are eliminated the big foreign retail giants will manipulate prices and our farmers would be forced to sell their products at a low price dictated by them. Our own squeezed out retailers and all those associated with the markets and retail trade would lose their livelihood and become jobless. It will add to our already existing social and economic woes which generates so much unrest and violence. (Para 44)

16 . The Committee therefore, is of the view that an institutional monitoring mechanism is essential to remove any unwarranted consequences of this policy. The Committee concurs with the recommendation of the Parliamentary Committee on Commerce in this respect, which suggested that “there is a need for setting up of a Retail Regulatory Authority, to look into the problems and act as a whistle blower, in case of anti competitive behaviour and abuse of dominance.” (Para 45)

17. The Committee is also cognizant of the recent media reports suggesting that the expected investment in multi-brand retail has not come yet and the retails companies are negotiating with the Government to dilute sourcing norms. The Committee cautions against any such dilutions. Any consultation in respect of FDI and its likely impact on SME sector, must mandatorily involve Ministry of MSME. The Committee also recommends that National Board on MSME, as statutory advisory body must take up the issue of impact of FTAs, Trade Policy and the FDI on MSME sector for its study and present its recommendations periodically. Any new clarification on the policy must be discussed in the Board. The Committee feels that without efficient regulatory frame work, this policy will not give intended benefits to the MSME sector, instead it may imperil its very survival. (Para 45) *************

Rajya Sabha Secretariat Department Related Parliamentary Standing Committee on Industry

XXIII

Twenty-third Meeting

The Committee met at 11.00 A.M on Monday, the 22 nd July, 2013 in Committee Room ‘D’, Parliament House Annexe, New Delhi.

Present

Shri Tiruchi Siva — Chairman

RAJYA SABHA

1. Shri Ashk Ali Tak 2. Shri Ananda Bhaskar Rapolu 3. Shri Basawaraj Patil 4. Prof. S. P. Singh Baghel 5. Shri Vivek Gupta

LOK SABHA

6. Dr. Rattan Singh Ajnala 7. Shri Hassan Khan 8. Shri. Kaushalendra Kumar 9. Shri Bharat Ram Meghwal 10. Shri Somen Mitra 11. Shri P. R. Natarajan 12. Shri Gorakhnath Pandey 13. Ch. Lal Singh 14. Dr. Kirit Premjibhai Solanki 15. Shri Ramsinh Rathwa

Secretariat

1. Shri. S.N. Sahu, Joint Secretary 2. Smt. Sunita Sekaran, Director 3. Shri. Roshan Lal, Joint Director

Contd…………..2/

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At the outset, the Chairman of the Committee welcomed the Members and briefed them that the agenda of the meeting, was to consider and adopt the Draft 246 th report on

Revival of Nagaland Pulp & Paper Company Ltd pertaining to the Department of Heavy

Industry, M/o Heavy Industries & Public Enterprises, 249 th report on Revival and

Restructuring of the Fertilizers and Chemicals Travancore Ltd pertaining to the

Department of Fertilizers, M/o Chemicals & Fertilizers, 250 th and 251 st reports on Impact of Foreign Direct Investment in Multi Brand Retail on MSME Sector and Implementation of Prime Minister’s Employment Generation Programme (PMEGP), pertaining to the

M/o Micro, Small & Medium Enterprises, respectively, of the Committee.

2. Thereafter, the Committee took up the reports for consideration and after some discussion, affected few changes and unanimously adopted the Draft 246 th , 249th, 250 th

& 251 st Reports.

3. The Committee then authorized the Chairman to present the 245 th , 246 th , 247 th ,

248 th , 249 th , 250 th & 251 st reports to the Hon’ble Chairman, Rajya Sabha since the House was in recess and the term of the Chairman of the Committee was ending on 24 th July,

2013.

4. The Committee also decided to present/ lay its 245 th , 246 th , 247 th , 248 th , 249 th , 250 th

& 251 st reports in both the Houses of Parliament during the coming Monsoon Session.

The Committee authorized Shri Ananda Bhaskar Rapolu, Member, Rajya Sabha and in his absence, Prof. S. P. Singh Baghel, Member, Rajya Sabha, and in the absence of both

Contd…………..3/

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Shri Ananda Bhaskar Rapolu and Prof. S. P. Singh Baghel, Shri Vivek Gupta, Member,

Rajya Sabha to present the 245 th , 246 th , 247 th , 248 th , 249 th , 250 th & 251 st reports in the

Rajya Sabha. The Committee also authorized Dr. Rattan Singh Ajnala and in his absence

Shri P. R. Natarajan, Members, Lok Sabha to lay copies of all the Reports on the Table of the Lok Sabha.

4. Thereafter, the Members expressed their appreciation on the functioning and performance of the Committee under the leadership of the Chairman. The Chairman then thanked everyone for their cooperation.

The meeting adjourned at 1.45 P.M

New Delhi Roshan Lal 22 nd July, 2013 Joint Director

To The Chairman and Members of the Department –Related Parliamentary Standing Committee on Industry