Shortly after coming into power, Delhi CM Arvind Kejriwal has written to the Department of Industrial Policy and Promotion (DIPP) withdrawing its permission for foreign direct investment in retail, thereby becoming the first state to do so, reports IBNLive.

This was mentioned in the Aam Aadmi Party’s manifesto for the Delhi elections last month, wherein the party had said it intends to protect small retailers from their organized retail competitors. Therefore this development is not surprising but points out how bizarre and myopic the central government’s FDI in retail policy is, since the previous Congress government had granted permission for FDI in multi-brand retail in Delhi.

Why The Government FDI In Retail Policy Is Flawed

Indian government had earlier left the decision on the state governments on whether they intend to approve foreign direct investment in the state or not, when it had relaxed the FDI limit in retail to 51% last September. It had also raised this question on the recently floated discussion paper on FDI in e-commerce, wherein it had asked on how will e-commerce companies restrict its operations to only states which had agreed to open frontend stores.

This essentially means, if there is a new government tomorrow in any of the 11 Indian states (Andhra Pradesh, Haryana, Maharashtra, Karnataka, Jammu Kashmir, Rajasthan, Uttarakhand and smaller states like Assam and Manipur) which have currently permitted FDI in retail, it can also easily change its stance and withdraw permission on FDI in retail if it wants.

Why Will Investors Invest In A Volatile Environment?

This uncertainty will continue to hinder investments in the sector, since why will any investor be interested in investing in such a volatile environment?

They were already spooked by the FDI guidelines and the following investigations, which had forced many businesses to change business models from an inventory-based model to a marketplace model (since marketplaces are allowed under the current FDI norms) or shut shop since they weren’t able to receive follow on capital for growth and this development could very well be the nail in the coffin for retail businesses in the country.

An uncertain environment will also severely impact entrepreneurs who are already struggling to be profitable in this capital intensive business, and as Info Edge Founder and Vice Chairman Sanjeev Bikhchandani had earlier pointed out there’s not enough capital to support the e-commerce sector in India. They need to focus on being viable rather than firefighting with regulations. How can businesses build scale or even survive in the future with such myopic regulations?