Thursday, December 1, 2011

FDI in retail in India - All this talk about violating WTO norms

There appears to be significant confusion as to the interplay between the FDI policy on retail and impact on India's obligations in the WTO. Primarily, the FDI policy on retail, inter alia, seeks to mandate that certain percentage of  products need to be sourced from small and micro enterprises globally. 

While this requirement of global sourcing of products from small and micro enterprises may be permissible, would mandating sourcing of a certain percentage of products from small and micro enterprises locally violate India's WTO obligations? In other words, if the FDI policy mandates that the Walmarts, Carrefours etc set up in India have to mandatorily purchase a certain percentage of the products  from local producers, can a WTO member challenge this policy as being inconsistent with WTO obligations?

Some reports in the Indian media have viewed it as being violative of India's WTO obligations. Without going into the merits of such a policy requirement, let us look at some of the legal provisions (GATTS, TRIMS and GATS) that have a bearing on this issue:


Article III which deals with the "national treatment" principles would be applicable. It states :

"Article III*: National Treatment on Internal Taxation and Regulation

1.       The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.*"

Thus, any regulation and requirement affecting the internal sale, purchase, distribution or use of products SHOULD NOT BE applied to imported or domestic products so as to AFFORD PROTECTION to domestic production. Would mandating an internal sourcing requirement from small and micro enterprises tantamount to affording protection to domestic production? If so, it would be violative of Article III (1) of the GATT agreement.


The Agreement on Trade Related Investment Measures supposes that certain investment measures restrict and distort trade. It provides that no contracting party shall apply any TRIM inconsistent with Articles III (national treatment) and XI (prohibition of quantitative restrictions) of the GATT. To this end, an illustrative list of TRIMs agreed to be inconsistent with these articles is appended to the agreement.

As per Article 2 of the Agreement on TRIMS

" Article 2

National Treatment and Quantitative Restrictions

1. Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994.

2. An illustrative list of TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 is contained in the Annex to this Agreement. "

The illustrative list of TRIMs that are inconsistent with the obligation of national treatment is as follows:

"   Illustrative List

1. TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require: 

(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production;
(b) that an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports."

Hence, TRIMS that require the purchase or use by an enterprise of products of domestic origin or from any domestic source and which are mandatory or enforceable under domestic law or administrative ruling will be in violation of the Agreement on TRIMS and hence in violation of the WTO obligations.


Where a member country undertakes specific commitments in sectors as per the schedule in the modes of supply, national treatment needs to be accorded as per Article XVI of GATS. Since India has not entered into specific commitments in the retail services sector, this obligation would not apply.

From the collective reading of the above provisions, it would indicate that mandating LOCAL sourcing of products in the FDI policy could violate WTO obligations. However, this would come up in a dispute only if a member country aggrieved by this measure challenges the measure in the Dispute Settlement Mechanism of the WTO.

The Indian Minister who is in charge of small and micro enterprises seemed to think otherwise

"I had raised the issue at the meeting and I was told that the clause is there. I will obviously demand support for Indian companies and not for foreign players," MSME minister Virbhadra Singh told TOI on Monday after DIPP clarified that the 30% sourcing clause will be for Indian units only."

Would this position be tenable under WTO obligations of India. At times the compulsions of local politics clash with the inevitability of global trade. This dichotomy is beautifully illustrated by Moises Naim in "The Dangerous Cocktail of Global Money and Politics" where he has argued that 

"‘All politics is local’ is an old truism popularised by the late US congressman Tip O’Neill. Understanding local problems, and even personal ones, and promising solutions to them, is far more critical for political success than hatching initiatives to address global threats. Planetary problems feel too remote to the average voter. Even in this information-saturated age, polls show that only a minority think about problems beyond their nation’s borders when deciding who to vote for or what political party to support"

He essentially argues that the need of local politics is diametrically opposed to the reality of international trade, global capital that they pull in different directions.

He concludes by sayng,

Protecting economies from the vagaries of global money sounds tempting and surely something must be done to mitigate the risks. But it is difficult, expensive and it easily leads to decisions that make the problem worse. ’Globalise’ local politics is also a project that is as attractive as it is difficult. Undoubtedly politicians should do a much better job of explaining to their constituents’ that what happens beyond the borders of their country-or city has implications for what happens inside their homes. This task is now easier in Europe. Sadly, for millions this crisis has become a quick but painful lesson on the direct links between ‘out there’ and ‘right here’.

Despite all these problems, we have no choice: we must make local politics more attuned to global imperatives and make global finance more responsive to local needs.

Undoubtedly, this is easier said than done. It may even sound naïve to suggest it. But I wonder if it would not be even more naïve to dismiss the urgent need to find ways to bridge the gap between the two."

Reading this reaction of some Congressional Democrats against the decision of the Obama administration to implement a WTO ruling sounds very familiar to opposition to WTO compliance in India over FDI retail. 

We are still in search of that middle path of local politics with global imperatives, both locally and globally!

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