From small to medium

IKEA's suggestions about FDI policy make sense

IKEA, the euro 25-billion Scandinavian retailer, wants some alterations in the guidelines for foreign investment in single-brand retail before it invests in India. Under current guidelines, any foreign retailer that invests more than 51 per cent in an Indian venture must source 30 per cent of its stock from Indian small enterprises. IKEA, in its 37-page application of June 22, has said that the 30 per cent sourcing criterion should be computed over a period of 10 years and not every year, and that there should be flexibility in the definition of small enterprises. Instead of junking the demands as another attempt by a multinational corporation to subvert national policy, the government must consider them on merit. IKEA has said that it is ready to source from small enterprises, but these enterprises may not remain small all their lives. At the moment, such enterprises are defined as those with an annual turnover of about Rs 5 crore or less. Many small suppliers may cross this threshold once they get sustained business from IKEA. If IKEA dumps them then and appoints a fresh set of suppliers, it will raise the cost of doing business. Also, it would make little sense if the purpose is to stimulate growth in the SME sector.

The other issue – that the 30 per cent sourcing from small enterprises be computed over 10 years – is related, but throws up additional issues. If Indian small enterprises have to sell their produce to a high-end retailer like IKEA, they need to upgrade their production processes. This requires not just investments in equipment but also tighter quality control. This takes time. Many international retailers work with their suppliers for years together before placing orders with them. If IKEA is to move fast in India, it may be difficult for the company to source 30 per cent of its stock from small enterprises on day one. On its part, IKEA has said that it will source 30 per cent over a 10-year period and that amount will be net of costs like transport, warehousing and marketing, and even taxes. The problem is that evaluating compliance over a multiple-year horizon becomes very tricky, and is open to manipulation — as export-incentive schemes have shown in the past. Yet the net-of-costs criterion also implies IKEA will not pad up the purchase from small enterprises with other selling costs. This is a generous offer that should not be dismissed offhand.

India’s opening up of single-brand retail in November last year (the cap on foreign investment was raised from 51 per cent to 100 per cent) hasn’t excited many retailers abroad. So far, there have been only two applications for investments: from IKEA and Pavers of the United Kingdom. At a time when confidence in India is waning, some fine-tuning of policy to attract foreign investment is perfectly in order. IKEA, after all, wants to invest euro 1.5 billion (about Rs 10,700 crore) in India over the next 10 to 15 years.