A working paper, authored by senior economic adviser with finance ministry H A C Prasad and additional economic adviser R Sathish, said foreign direct investment in retail should be allowed in a phased manner, starting with metros.
While FDI is allowed in single brand product retails with 51 per cent cap, elsewhere FDI is prohibited in this vast sector.
"There is a large unorganised sector with low tax compliance. Along with allowing FDI in retail in a phased way beginning with metros, the existing mom and pop shops (kirana shops) could be incentivised to modernise and compete effectively with the retail shops foreign or domestic," said the paper, titled 'Policy for India's Services Sector.'
When contacted, Prasad said since farmers benefit due to modern retail trade, there is a need for opening this sector as well which can provide greater market access for India's exports.
While opening up of the multi-brand retail to FDI has been favoured by the Economic Survey beginning with the food sector in the past, economic think tank ICRIER had found that apprehensions that organised retail will result in massive unemployment and have an adverse impact on farmers is not supported by evidence.
However, no decision has been taken on the issue as it is quite politically sensitive. A Parliamentary Standing Committee report had not only opposed FDI in retail, but also the entry of big domestic players to protect the unorganised sector.
The working paper also made it clear that the views expressed in it are of authors and not of the finance ministry.
On divestment, the paper said there is a plenty of scope for divestment in the case of public sector units (PSUs) in the services sector under both the Central and State governments.
Prasad said, "Around 27 PSUs in the services sector can be considered for divestment. These include Telecommunications Consultants of India Ltd, MTNL and BSNL."
He also favoured divestment in RITES, Engineers Projects Ltd, PEC Ltd, ITPO, Water and Power Consultancy Services, MSTC Ltd, National Building Construction Corporation, State Trading Corporation of India Ltd, MMTC Ltd, Shipping Corporation of India Ltd, Balmer Lawrie & Co Ltd and National Film Development Corporation, etc.
The paper said some of these companies like SCI and Balmer Lawrie Construction Corporation were earlier listed for strategic sales. However, in February, 2005, divestment through strategic sale of profit-making CPSUs were called off as per the national common minimum programme of the UPA government in its earlier stint and they continued as CPSUs.
"Now divestment of these companies can be initiated. In the case of some of the companies there are some labour related issues and one company, namely, National Film Development Corporation is a loss making company," the paper said.
Among the 27 companies, divestment could possibly be initiated immediately in the case of SCI, RITES, Engineering Projects India, ITPO, STC and MMTC, Prasad said.
In the case of NBCC and NFDC, there can even be full sale of the companies, he said. In the case of ITPO, exporters and even Exim Bank of India could have a stake, Prasad opined.
In the case of the companies, where there are issues related to labour etc, some percentage of the government shares could be offloaded, he said, adding these divestments can, not only yield sizeable revenue for the government, but also make these companies more efficient contributing to the growth process.
After a lull for the previous few years, the government made divestment in NHPC, Oil India, NTPC, REC and NMDC last fiscal. This fiscal, the government has set a target to garner Rs 40,000 crore (Rs 400 billion) from divestment, against around Rs 25,000 crore (Rs 250 billion) last fiscal.