Third tweak in retail sourcing norms may open floodgates for FDI

As part of FDI retail policy compliance, international chains have been asking the govt for years to count their India sourcing for global operations

The government is considering a relaxation of the domestic sourcing norms in the retail sector, as media reports have suggested. This is not the first time that the Department of Industrial Policy & Promotion (DIPP) is easing the sourcing norms, which is seen as the biggest obstacle in the way of foreign investment in retail trade. But the latest plan—to count India procurement for global operations as part of local sourcing obligations—will come as a major relief for several multinationals and may just open the floodgates for foreign direct investment (FDI).        

As per the current policy, any foreign retailer who owns more than 51 per cent in a joint venture with an Indian company must locally source 30 per cent of the value of goods purchased for its domestic operations. As part of compliance to the FDI retail policy, international chains have been asking the government for years to count their India sourcing for global operations. It’s only now that the files have started moving and DIPP is thinking of revised guidelines.

Before this, the sourcing norm was changed from ‘’mandatory 30 per cent sourcing from Indian MSMEs’’ to ‘’mandatory sourcing from Indian companies’’ when Ikea engaged with the government at the time of making its investment proposal. Subsequently, the guidelines were changed again when the government gave five years to all foreign retailers to comply with sourcing norms. As per that norm, a foreign retailer needs to fulfil the 30 per cent sourcing norm five years after setting up the first store in India.        

Company executives and analysts agreed that many marquee global retailers including Ikea, H&M, Marks & Spencer, Zara, Uniqlo, Walmart, Tesco and others have been sourcing from India for decades and that the quantum is expected to rise despite competition from other countries such as Bangladesh and Sri Lanka. So, if that sourcing is taken into account, multinationals can set up retail operations in India faster, they pointed out.

Ikea and H&M, both Swedish single-brand companies present in India, would be among the first to benefit from this move as they have been sourcing from the country for their global operations. Other big brands, which are yet to enter India may be encouraged to invest as well. Even multi-brand retailers such as Walmart and Tesco may see things differently about India once the sourcing norm changes. It’s a different matter that the current NDA government needs to send out a signal that FDI in multi-brand retail is welcome.

As for furnishing major Ikea, the current sourcing value from India is at an estimated Euro 318 million and it wants to double to more than Euro 600 million by 2020. That, analysts said, may be enough for the company to comply with the revised sourcing guidelines. Company sources, however, said that Ikea has big sourcing plans in India and that it has for the first time started exporting sofas and mattresses from Indian suppliers in Hyderabad and Bengaluru respectively. So far, the biggest FDI commitment in retail has come from Ikea, at Rs 10,500 crore.

The latest change in the sourcing norm will still not help a cutting-edge tech company like Apple, it is believed. That’s because, for a company that’s focused on iPhone, iPad and the like, sourcing from India in large scale is tough. Separately, the government is looking at dealing with sourcing issues related to hi-tech companies, it is learnt.