In a clear message to foreign retailers eyeing entry into single-brand retail in India through the wholly-owned route, the Government has ruled out even ‘theoretically discussing' any change in the mandatory requirement for prospective foreign direct investors to source from local, small and medium enterprises (SMEs).
The clause is part of the newly notified guidelines for 100 per cent FDI in single-brand retail, and had been widely opposed by major foreign retailers, especially in the luxury segment.
No room for discussion
Mr P. K. Chaudhary, Secretary, Department of Industrial Policy and Promotion (DIPP), told
The Government decided to increase the FDI limit in single-brand retail from 51 to 100 per cent. Accordingly, a notification was issued on January 10. It said that in respect of proposals involving FDI beyond 51 per cent, there will be mandatory sourcing of at least 30 per cent of the total value of the products sold from Indian ‘small industries/village and cottage industries, artisans and craftsmen.'
The argument is that such a step will provide stimulus to domestic manufacturing value addition and help in technical up-gradation of local/small industry.
Ikea reconsidering?
This mandatory clause has not gone well with foreign retailers. Leading Swedish furniture and home products retailer Ikea is reportedly considering holding back its plans for India. It has found the mandatory sourcing clause a concern. However, DIPP officials expressed surprise over such reports, as they claimed that Ikea was already souring from India and was planning to go ahead with its India entry.
They said the company was yet to approach the Government formally. If the company had any issues over standards or quality of local products, the Industry Ministry can take the matter to the Ministry of Micro, Small and Medium Enterprises for resolution.
“Clause of sourcing has been added at the behest of the MSME Ministry and they are well aware of the standards issue,” they added.
Meanwhile Ikea's concern has been echoed by retail analysts. Mr Purnendu Kumar, Senior Vice-President (Retail) of Technopak, a retail consultancy firm, said, “The condition of sourcing is a difficult one as their (foreign retailers) level of sophistication is very high.”
A small firm will need to invest higher amount for meeting such sophistication criteria. If it does so, then it will not be a small firm because of the investment cap, he pointed out.