The department of industrial policy and promotion (DIPP) is ready to consider some of IKEA’s significant demands, even as it feels the proposal by the Scandinavian furniture giant is a “test case” to interpret the foreign direct investment (FDI) policy on single-brand retail “in a more efficient manner”. This, the department feels, would pave the way for other potential investors.
Significantly, it is considering fixing the number of years on which the quantum of the mandatory 30 per cent sourcing would be calculated to three.
In its application, the euro 25-billion IKEA has demanded the sourcing amount be considered over cumulative periods of 10 years each from the date of approval of its application. DIPP, under the ministry of commerce and industry, is already working on calculating a specific number of years based on which the requirement would be calculated.
|PROPOSED CHANGES BY DIPP
- Mandatory 30 per cent sourcing requirement to be fixed for a cumulative 3 years or it would be made on a year-to-year basis
- Inputs costs would be excluded while calculating the sourcing amount
- Value of exports from SMEs to be determined based on either the actual value of a product or the price at which it will be sold
- Definition of SME to be eased with relaxation on $1 million threshold
- DIPP to send its comments for FIPB approval following which the changes would be notified
“We are fine-tuning the policy, and would soon take a call on this. It could be based on a cumulative period of about three years. We are also looking at the option of a year-to-year basis. The proposal made by IKEA is test-case. We are hopeful of pushing this through. This investment means a lot of money for the country,” a senior DIPP official told Business Standard.
In its 37-page letter to DIPP and the Foreign Investment Promotion Board, IKEA had stated many other far-reaching demands for it to invest about euro 1.5 billion in India to set up 25 retail stores over the long term, through a wholly owned subsidiary.
Another significant demand is the inclusion of value of exports from small scale units in complying with sourcing norms. On this, the government is working to determine which value to consider, as there is always a difference between the value at which the product is made and that at which it is sold in international markets.
The DIPP is planning to ease the policy by considering whether a foreign retailer would be allowed to exclude its inputs costs from the sourcing mandate. This, too, is based one of IKEA’s demands —input costs be excluded while calculating the sourcing quantum from small and medium enterprises in India.
It is somewhat odd that the company is so concerned with the sourcing requirements of the FDI policy, as it already works with 70 suppliers and 1,450 sub-suppliers in 11 states in India. Last year, the company sourced goods worth $450 million from India. This is expected to rise to $1 billion by 2016 and $2 billion by 2020.
In its application to the Centre, IKEA has also sought flexibility in the definition of small and medium enterprises. This would help provide their products and services to Indian consumers at affordable rates. According to the current policy on single-brand FDI, global retailers have to source 30 per cent of their requirement from small industries in India. The investment of these industries on plant and machinery should not exceed
$1 million. IKEA is uncomfortable with this clause.
“We have been working on this for some time now. We have already had initial discussions on this with the Ministry of Micro, Small and Medium Industries, but are yet to make a concrete proposal. They are fairly receptive of our concerns,” the official said, adding DIPP said this would require “proper policy interpretation”, not any “change of policy”.
The department would soon send its comments to the FIPB, after which the clarifications would be notified.
After returning from St Petersburg, Russia, where he cracked the deal with IKEA chief Mikael Ohlsson, Commerce & Industry Minister Anand Sharma had said IKEA had been working with Indian small sector units for a long time. He added the company was already sourcing 30 per cent of its products from India. These ranged from textiles and carpets to metal products.
In the long run, the IKEA Group plans to set up IKEA restaurants and cafes, IKEA Swedish food markets, areas for children’s recreation and publications, among others.