FDI in retail: Local sourcing seems to work well in multi-brand retail, but not in single brands.
The government is considering waiving the local sourcing requirement for foreign investors in single-brand retail on a case-by-case basis to attract investments, as reported by a senior government official to ET.
In January, the government increased the foreign direct investment (FDI) limit in single-brand retail from 51% to 100%, albeit with certain conditions, including the mandatory sourcing of 30% of inputs from local small- and medium-sized companies. However, this sourcing requirement appears to discourage retailers from raising their stake beyond 51% and is deterring potential investors considering entering the Indian market.
The sourcing clause might be eliminated for single-brand retailers who can demonstrate that it is not feasible for them to procure goods from local small enterprises due to technological constraints or product sophistication.
The industry ministry is expected to seek input from other ministries before making a decision. The official stressed the sensitivity of this issue, stating that it needs to be handled with care. Up to this point, less than Rs 200 crore in FDI has entered the single-brand retail sector.
Some major retailers, initially interested in entering India through the 100% FDI route, are now facing obstacles due to the sourcing requirement. For instance, Sweden's Ikea suspended its plans to enter India, citing the sourcing requirement from small units as an obstacle that needs review. Small units are defined as having a total investment of up to $1 million or about Rs 5 crore.
Adidas, too, said that meeting the local sourcing norm from SMEs will be difficult for the company and its sister concern Reebok, as both are moving to large manufacturers for economies of scale. However, no company has approached the department of industrial policy and promotion (DIPP) yet seeking a rollback of the requirement, the official said.
The DIPP is a government department that frames policy on FDI. Most foreign single-brand retailers are still assessing if it is possible for them to meet the 30% sourcing clause before they increase their stake beyond 51%.
The government had initially said that the 30% sourcing could be waived in the case of very high precision goods, but the final policy was silent on the issue. There is a realisation in the government that local sourcing seems to work well in multi-brand retail, but may not be feasible in the case of single brand. The government had proposed allowing 51% FDI in multi-brand retail, but it could not be implemented due to stiff political opposition.
Originally published in the Economic Times dated 26th March, 2012, written by Amiti Sen, associated with Economic Times Bureau, New Delhi.
The government is considering waiving the local sourcing requirement for foreign investors in single-brand retail on a case-by-case basis to attract investments, as reported by a senior government official to ET.
In January, the government increased the foreign direct investment (FDI) limit in single-brand retail from 51% to 100%, albeit with certain conditions, including the mandatory sourcing of 30% of inputs from local small- and medium-sized companies. However, this sourcing requirement appears to discourage retailers from raising their stake beyond 51% and is deterring potential investors considering entering the Indian market.
The sourcing clause might be eliminated for single-brand retailers who can demonstrate that it is not feasible for them to procure goods from local small enterprises due to technological constraints or product sophistication.
The industry ministry is expected to seek input from other ministries before making a decision. The official stressed the sensitivity of this issue, stating that it needs to be handled with care. Up to this point, less than Rs 200 crore in FDI has entered the single-brand retail sector.
Some major retailers, initially interested in entering India through the 100% FDI route, are now facing obstacles due to the sourcing requirement. For instance, Sweden's Ikea suspended its plans to enter India, citing the sourcing requirement from small units as an obstacle that needs review. Small units are defined as having a total investment of up to $1 million or about Rs 5 crore.
Adidas, too, said that meeting the local sourcing norm from SMEs will be difficult for the company and its sister concern Reebok, as both are moving to large manufacturers for economies of scale. However, no company has approached the department of industrial policy and promotion (DIPP) yet seeking a rollback of the requirement, the official said.
The DIPP is a government department that frames policy on FDI. Most foreign single-brand retailers are still assessing if it is possible for them to meet the 30% sourcing clause before they increase their stake beyond 51%.
The government had initially said that the 30% sourcing could be waived in the case of very high precision goods, but the final policy was silent on the issue. There is a realisation in the government that local sourcing seems to work well in multi-brand retail, but may not be feasible in the case of single brand. The government had proposed allowing 51% FDI in multi-brand retail, but it could not be implemented due to stiff political opposition.
Originally published in the Economic Times dated 26th March, 2012, written by Amiti Sen, associated with Economic Times Bureau, New Delhi.
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