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Sourcing norms for single-brand retail likely to be reviewed

Nayanima Basu & Nivedita Mookerji  |  New Delhi 

Rules for foreign investment in single-brand retail might be tweaked again, if signals coming from the government and the industry are any yardstick. The Narendra Modi-led central government, opposed to foreign direct investment (FDI) in multi-brand retail, seems to be planning to remove hurdles for international single-brand retailers, which are allowed up to 100 per cent FDI (with riders).

Even as some top international brands want to open fully owned businesses in India, mandatory sourcing norms have turned out to be the biggest hurdle for those into niche categories. According to a source, the government is willing to listen to their concerns.

Top executives of Swedish furniture maker IKEA and US-based smartphone giant Apple Inc are learnt to have met Commerce & Industry Minister Nirmala Sitharaman recently to discuss business prospects in India. During these meetings, both companies are said to have suggested an alternative route under which the government could achieve its objective of job generation — the very backbone of the sourcing norm — and the companies would not be compelled to compromise on their products’ quality.

At present, though up to 100 per cent FDI is allowed in single-brand retail, only 49 per cent can come through the automatic route. The sourcing norms, which kick in beyond 51 per cent FDI, stipulate that companies source from India 30 per cent of the value of goods purchased, preferably from micro, small and medium enterprises (MSMEs), village and cottage industries, artisans and craftsmen.

In multi-brand retail, though the United Progressive Alliance government allowed 51 per cent FDI, subject to state approval, the National Democratic Alliance (NDA) leaders have maintained they are opposed to foreign investment in this segment. The current government has, however, not effected any change to the FDI rules for multi-brand retail. The UK’s Tesco, in partnership with the Tata group, is the only foreign company to have entered multi-brand retail in India so far; its plans are limited to Maharashtra and Karnataka.

In fact, the previous government had in 2012 changed the mandatory sourcing norm for single-brand retail after IKEA made its application to invest euro 1.5 billion in India. The sourcing norm was changed from “mandatory 30 per cent sourcing from Indian MSMEs, village and cottage industries” to “mandatory 30 per cent sourcing from India, preferably from MSMEs, village and cottage industries….”. The rule change had followed the Swedish chain’s representation to the government of the day that 30 per cent sourcing from Indian MSMEs was not feasible for the kind of products it made.

  • Mandatory sourcing norms are the biggest hurdle for foreign single-brand retailers and the government is willing to listen to their concerns
  • IKEA and Apple Inc executives are learnt to have met Commerce and Industry Minister Nirmala Sitharaman to discuss business prospects here
  • Both companies seemed to have suggested an alternative route through which the government could achieve its objective of job generation, the backbone of the sourcing norms
  • This way, the companies will also not be compelled to compromise on quality of their products

Subsequently, Apple told the government it wanted to open fully owned stores in India but it would not be possible for it to source from India. Also, IKEA, which last month bought 13 acres of land in Hyderabad for its first India store, is learnt to have sought more time to comply with the 30 per cent sourcing guidelines.

It had suggested the government that instead of sourcing inputs from India, it would impart specialised and niche manpower training, set up centres of excellence (CoEs) and conduct community-based work programmes beyond their corporate social responsibility (CSR), a top official in the commerce & industry ministry told Business Standard.

This was because, the official said, some companies like these would not be able to source inputs from the country, especially MSMEs, due to these enterprises’ lack of expertise and wherewithal. Besides, such a clause would upset their network of global value chain.

Replying to a Business Standard query on whether IKEA could source 30 per cent from India, a company spokesperson said: “It takes time to develop new suppliers and sustainable production capacities where some categories do not even exist today. We are on the way.” However, “India is a very important market for IKEA and we have been sourcing from India for almost 30 years. Today we source for euro 315 million and we plan to double that by 2020”, the company said. Over time, IKEA’s ambition is to source even more than 30 per cent to reach the affordability goals and to be profitable, according to the spokesperson.

Last September, IKEA had announced a ‘Make In India’ initiative, a pet programme of the Modi government. While the company said there was no indication from the government yet on whether socially useful projects could replace the sourcing norms, IKEA had been focusing on such steps. IKEA Foundation, the company’s philanthropic arm was one of its main pillars of doing business in India, the spokesperson said. “The Foundation that had set a target of helping 100 million children globally by this year has already reached 178 million — over 100 million in India alone.” Also, it is allocating euro 25 million this year to enhance activities on preventing child labour and woman empowerment in India, through partners like Unicef and Save The Children.

The Cupertino (California) -based Apple Inc, which has around two per cent share of India’s smartphone market, is learnt to have planned a massive ramp-up of its distribution network in the country. The American technology company has also decided to deliver “high-quality education to low-income communities” with a focus on primary education, initially in Bengaluru, Ahmedabad, Pune and Mumbai. It also wants to enhance teaching approaches through use of technology, besides addressing environment issues in local communities, according to Apple’s CSR plans.

First Published: Mon, August 03 2015. 00:56 IST