In the past five years, India has witnessed significant debate, brainstorming sessions and political drama over the issue of liberalizing retail services for foreign investors, particularly in the multi-brand sector. For the most part, the arguments have concerned the fate of local retailers, “kirana shops,” pursuant to permitting foreign direct investment (FDI) in this sector. While one school of experts has expressed apprehension about local retailers being eliminated from the market if such FDI is permitted, the other school has advocated that such FDI will, aside from boosting the economy and foreign exchange reserves, generate employment on a large scale. Balancing both of the foregoing concerns, the Indian government recently liberalized FDI in this sector up to 100 percent in single-brand retail and up to 51 percent in multibrand retail services. Although this move has been appreciated by the industry and the investor class, such investments are subject to a significant number of restrictions in terms of minimum capitalization, local sourcing of materials, prior approval and other such requirements.
Needless to say, India, being a sovereign nation, has the authority to impose such investment restrictions at the municipal level. Having said that, given the unification of the world economy through globalization, it would be inadequate and myopic to confine the assessment of such restrictions to the municipal level. The justifiability of such restrictions needs to be assessed at the global level against the country’s international commitments, more specifically commitments under the World Trade Organization (WTO), considering that WTO membership comes as a package of obligations across different areas, namely trade in goods, trade in services and traderelated investments.
While much has been deliberated with regard to the merits and demerits of India’s restrictions on FDI in retail services from the perspectives both of economics and of India’s municipal laws, the question of whether such restrictions are sustainable against the radar of the WTO has been overlooked on most debate platforms. Therefore, this article attempts to assess India’s FDI norms in the retail trade sector vis-à-vis its commitments, if any, under the General Agreement on Trade in Services (GATS) within the auspices of the WTO.
Further, this article reviews the commitments made by a few other countries in retail services and the nature of the limitations imposed by such countries. Also, this article suggests a way forward for India, factoring in the various trade barriers applicable to retail trade services, whereby the country might harmonize its municipal investment restrictions with future commitments under GATS.
GATS envisage the objective of establishing a sound multilateral framework or principles and rules for trade in services. Many countries directly have laws, which restrict entry of foreign services enterprises in areas like finance, media, communications, transport etc.
The GATT looks upon these regulations relating to investment in the service sector as distorting factors affecting free trade. Hence these distortions have to be eliminated or minimized. The GATS Agreement covers all services (there are 161 tradable services under GATS) financial services (banking insurance etc), education, telecommunications, maritime transport etc.
Service trade expansion has big prospects though countries are in general reluctant to liberalise it. According to the WTO, “while services currently account for over 60 percent of global production and employment, they represent no more than 20 per cent of total trade (BOP basis).”
The Four Modes of Services Supply
The GATS define services in four ‘modes’ of supply: cross-border trade, consumption abroad, commercial presence, and presence of natural persons.
Mode 1: Cross Border
Services which themselves cross-frontiers from one country to another e.g. Distance learning, consultancy, BPO services.
Mode 2: Consumption abroad
Services, which are made available within a country for foreign consumers’, e.g.: tourism, educational students for students, medical treatment etc.
Mode 3: Commercial Presence
Services supplied by an entity of one country, which is commercially pressed in another e.g.: banking, hotel etc.
Mode 4: Movements of natural persons
This is a foreign national providing services like that of doctor, nurse, IT engineer etc. functioning as a consultant, employee, from one country to another.
Services given by governments are exempted from GATS. These are services provided on a non-market basis (e.g. Social security schemes, health Education etc). Besides, Air Transport Services are also exempts from coverage that affects traffic rights. GATS divides services liberalization commitments into two – general obligations and specific obligations.
The GATS is basically a primary step towards service trade that was reached at the Uruguay Round. Service trade liberalization under it is at the entry level stage. As a Multilateral rule making and trade liberalization regime, the GATS has to be expanded by making further discussions.