Mandatory sourcing clause a challenge in long term: IKEA

IKEA announced Euro 1.5 bn investment in India

Swedish furniture and home products retailer IKEA, which plans to invest Euro 1.5 billion in India, today said the mandatory sourcing clause from small enterprises remains a challenge for the firm in the long term.

Although, the company has said in the short term it will comply with the government guidelines, it said the definition of small industries needs to be "reviewed" in future.

"In the longer term, however, the mandatory sourcing of 30 per cent of the value of goods sold in India from domestic small industries remains a challenge," IKEA official spokesperson Malin P Beckeman said in a statement.

For the IKEA Group to secure low prices and truly benefit the Indian economy and society, small industries need to be allowed to grow and develop, he added.

"It is therefore important that the definition of small industries in the future is reviewed and provides flexibility," Beckeman said.

Earlier this year the company had postponed announcing its plans to enter India citing that "the conditions applied to local sourcing from SMEs might be difficult for it to live up to."

While allowing 100 per cent FDI in single brand retail, the government had put a condition that up to 30 per cent of the goods must be sourced from small enterprises in India.

On the finalisation of the firm's India plans, Beckeman said: "Having studied the guidelines we believe that we can live up to the guidelines and keep within the spirit of the policy."

He said the company has long term plans for the Indian market and it will source at least 30 per cent of the purchase value of products sold in India from its direct and indirect supply chain comprising Indian small industries.

"According to our long-term estimate for India, the IKEA Group would invest approximately Euro 1.5 billion in retail expansion over the coming years," he said.

He said the company is eager to set up its first store in India, subject to government's approval.

IKEA has already submitted an application in the Department of Industrial Policy and Promotion (DIPP) to set up a fully owned subsidiary in India.

"We expect the DIPP to expeditiously process our application and present the same before the Foreign Investment Promotion Board (FIPB) for consideration of the Government of India," he said.

IKEA currently works with close to 70 suppliers and 1450 sub-suppliers, including many small industries in India.

"Establishing IKEA Retail stores in India would develop and strengthen our relationship with suppliers and producers even further," the company said.