Saturday, November 26, 2011

Foreign Direct Investment in retail, India and WTO

The decision of the Government of India to allow foreign direct investment in the retail sector has thrown up amongst other things India's obligations under the WTO. Is India obligated to allow FDI in retail? Actually the commitments of India under GATS does not include retail distribution services. Hence it is not obligated to provide market access in this sector.

Reuters stated that India's Industry Secretary as saying that WTO commitments do not allow local sourcing of products to be a condition for the investment. This obligation does not arise from the GATS, but from the general principle of affording "national treatment" in the GATT Agreement. This implies that an imported product has to be given the same treatment as a locally made product.

An interesting fact about retailing sector in the world is  that while 80 % of the retailing in the US is from organised retailing (Walmarts etc), in India organised retailing is only 2% of the total retailing sector. These facts and a good analysis of the impact and options for India in this sector is found in this study by Arpita Mukherjee.

Will the entry of the big players in the Indian market wipe out the large unorganised small, neighbourhood retail trade?


gulzar said...

but is it not true that "national treatment" can be relaxed under certain conditions? what are those possible conditions? in simple terms, assuming that the government has to minimally regulate the retail market, in the aftermath of its liberalization, so as to promote local sourcing (and with all its attendant benefits, see this paper,, what should be its strategy so as to not run afoul of its WTO commitments?

Srikar said...

I guess a number of conditionalities can be imposed like small scale sourcing, area restrictions(population basis, back-end infrastructure, State specific permissions etc. However, I'm not sure whether the national treatment condition for sourcing of products can be relaxed?