Testing the “Exception Raj”

By Sarah Watson —

An Apple reseller in Bangalore, India. Source: Lawrence Sinclair's flickr photostream, used under a creative commons license.

An Apple reseller in Bangalore, India. Source: Lawrence Sinclair’s flickr photostream, used under a creative commons license.

On May 26 the Wall Street Journal reported that the Finance Ministry of India’s Foreign Investment Promotion Board (FIPB) had decided not to waive the 30 percent local sourcing requirement for single-brand retail in the case of Apple. A week earlier, a French firm’s attempt to become India’s first 100 percent foreign-owned defense manufacturer met a serious bureaucratic roadblock. Both applications rely on recent changes to India’s policy on foreign investment that the Modi government has sold as signs of India’s increasing openness to global business. But both may be falling prey to political headwinds — exactly the kind of unpredictability and particularism that have given India a bad name with foreign businesses.

Apple’s application to waive the 30 percent local-sourcing requirement for foreign-owned single-brand retailers was the first test of the Modi administration’s new Foreign Direct Investment (FDI) policy on single-brand retail, announced last fall following the Bihar elections. The policy specifically states that the 30 percent local-sourcing requirement (by value) for brands that are majority foreign-owned can be waived if local sourcing is not possible and if a waiver would bring “state-of-the-art” or “cutting-edge” technology to India.

The Finance Ministry’s decision, which was apparently approved by Finance Minister Arun Jaitley, reversed that of a panel constituted to decide when single-brand retailers meet the threshold for an exception. No rationale was given, although an official told the Wall Street Journal that companies that want to sell in India should manufacture in India. The decision followed Apple CEO Tim Cook’s personal goodwill tour, which featured a meeting with Prime Minister Narendra Modi and the announcement of two new Apple development hubs in India.

A week previously, the FIPB announced that at its April meeting it had deferred the application of French defense manufacturer DCNS to establish a wholly-owned subsidiary in India. Although India generally limits FDI in defense to 49 percent, last fall it also opened the possibility of 100 percent ownership via a special route “wherever it is likely to result in access to modern and ‘state-of-art’ [sic] technology.” DCNS, which hopes to build submarine parts in India, was the first company to seriously explore this route, submitting its proposal in March. The proposal was not on the agenda for the FIPB’s May meeting and it is unclear when it will be considered again.

Although Apple and DCNS are very different businesses, their cases are similar in that they both test the Modi government’s willingness to follow through on tantalizing high-profile promises of FDI liberalization, if only on a case-by-case basis. (Modi recently said that he had allowed FDI up to 100 percent in defense.) The eventual outcomes of each application will be closely watched by companies that may be considering doing business in India but have so far held off because they fear losing control of their intellectual property when they are forced to become minority owners of a joint-venture with an Indian firm.

The Defence Ministry appears to be trying to take a more open approach. Minister of Defence Manohar Parrikar, concerned that raising the cap on FDI in defense from 26 to 49 percent attracted only $200,000 in investment in 18 months, has circulated a draft list of conditions for when the government will allow 100 percent investment. Since this list has not been approved, it will not necessarily affect the progress of DCNS’s application, but it could clarify matters for future applicants. DCNS, which makes India’s Scorpene-class submarines and was recently selected to build Australia’s new submarine fleet, wants its Indian subsidiary to build a new type of Air Independent Propulsion system that will give Indian submarines greater endurance. This technology could give India an edge when patrolling the Indian Ocean, where Chinese submarines are making increasingly frequent appearances.

India is not required to allow Apple to enter, of course, and it may be hoping that the issue will become moot once it gets its own Foxconn facility. What is important is that India announced that it was willing to lower its very high barrier to entry for foreign-owned companies; a high-profile foreign-owned company that appears to meet the qualifications took India up on its offer; and India rejected its application with no explanation. Future applicants may well be deterred by the specter of a bureaucratic inquiry into the definition of “cutting edge” and “state of the art.” For the present, Apple products remain widely available in India at inflated prices, while India loses out on the tax revenue and high-quality jobs that would come with a national network of Apple stores.

Ms. Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS. Follow her on twitter @SWatson_CSIS.

Sarah Watson

Sarah Watson

Sarah Watson is an associate fellow with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.


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