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Wednesday, 05 June 2013 00:00
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From retail to pharma, a series of self-defeating laws

Foreign investors who have been made to believe the FIPB is the apex body for clearing investment into the country must be amazed by the commerce ministry’s communication to the FIPB: please do not clear any FDI applications for taking over existing or brownfield pharma projects till we have examined the issue further. What is the issue the commerce ministry wants to study? Apparently, the commerce ministry is of the view that, were foreign investors allowed to buy existing Indian pharma firms, this could lead to a situation where such firms could stop producing essential drugs that the local firms were producing. In other words, Indian consumers would be badly affected by this. While that sounds like the right thing to do, it would be a good idea to look at the facts first. With 5,000-10,000 pharma firms in the country and the market leader having under a 5.5% market share, it is difficult to see how foreigners taking over Indian firms will lead to a substantial reduction in the production of essential medicines. Even in the case of the National List of Essential Medicines (NLEM) that the government swears by, there are an average of 60 manufacturers per drug, ranging from 20 in the case of the anti-hypertensive Enalapril Maleate to 124 in the case of the painkiller Paracetamol. So if the government is to be in favour of disallowing FDI in brownfield projects, it needs to make public the evidence it is basing its conclusions on.

 

Nor are such self-defeating laws restricted to pharmaceuticals. Since the DIPP meeting that was scheduled to have take place yesterday was cancelled, there is still no clarity on what the final word is on the jumble of rules governing FDI in multi-brand retail. Since most large global retailers function with a host of suppliers setting up different parts of the supply chain for them, the mandatory 50% of investment in back-end infrastructure was always a bad idea, yet the government formulated the rule. When it became clear that no FDI was forthcoming 8 months after the government came out with the policy, there have been various leaks to say the 50% rule applies to just the first tranche of investment, but there has been no official word on this. Why have such a rule when it is obvious a Walmart or a Carrefour needs to have a robust back-end, whether of its own or a third party’s is irrelevant, if it is to supply goods across the country? Similarly, if the idea of having domestic sourcing clauses is to ensure Indian suppliers move up the quality curve, why put a ceiling of $1 million in plant and machinery after which the retailer will have to look for other SME suppliers to fulfil the obligatory sourcing quota—after all, any vendor who wishes to supply large volumes to retailers will have to invest more in plant and machinery? If this isn’t bad enough, the finance ministry has asked the commerce ministry how single-brand retailers like, say, Marks & Spencer, were selling various sub-brands of shoes or clothes. While some clarity may finally be shed on the laws, they serve little purpose except to confuse investors and increase the bureaucracy’s powers to harass investors.

 

 
 

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