No room for piecemeal policy changes

What’s common between a Netherlands-headquartered multinational group and the changing face of India’s single-brand retail policy? A lot, it seems. With the government making yet another tweak to the policy, it’s a surprise that for more than a decade now, we are still trying to fix the guidelines for single-brand retail, a category that’s unique to the Indian market and one that’s hardly controversial. 

Through the piecemeal tweaks and turns over the years, furnishing major Ikea has been a reference point, but the focus has now shifted to Cupertino-based Apple to see if it finally decides to set up its signature stores in India.

In June 2006, during the UPA government, Ikea made headlines by announcing it was studying the Indian market. It wanted to be here in five years, provided the foreign regulations changed. Two years later, in 2008, it pointed out 51 per cent foreign ownership rules were a hurdle for the company’s plans. In 2009, the company put off its India plans as the foreign direct investment (FDI) policy was coming in the way. It took another three years for the Manmohan Singh-led government to change the FDI rule. In 2012, the government took a call to relax the FDI rules and allow 100 per cent foreign investment in single-brand retail. 

The FDI floodgates didn’t open up, but the largest furnishing chain in the world kept its word. Soon after the rule change, it made a proposal to invest €1.5 billion in India to open 25 stores spread over some years. However, several conditions, which Ikea and others in the industry called “tough”, remained. 

One of the first conditions to be relaxed was linked to local sourcing. The original condition was mandatory 30 per cent (of the value of the goods sold in India) sourcing from Indian micro, small and medium enterprises (MSMEs) for any single-brand chain with more than 51 per cent foreign holding. This was changed to 30 per cent mandatory local sourcing, while doing away with the MSME condition. That helped Ikea firm up its India plans and work towards setting up its mega stores, similar to those in other parts of the world. Another popular Swedish brand H&M entered India through full-ownership. Other foreign brands such as Marks & Spencer, Zara and many more have entered the country as well but either through local partnerships or through the franchisee route.    

Despite action in the space, industry asked for further relaxation and got some relief too. For instance, they don’t have to start with 30 per cent local sourcing compliance from day one. They also wanted their India procurement for foreign markets to be set off against the 30 per cent sourcing requirement. The current government is expected to allow that, making things simpler for foreign players as most international majors in fashion, textile and furnishing space have been sourcing from India for years to supply goods to foreign markets. However, there are others such as Apple and Rolex, which don’t source from India. And that’s the tricky part. 

The policymakers must understand that the bit by bit tweaks in FDI norms, spread over long years, won’t help in the long run, and certainly not everyone. If we need serious foreign investment to flow into India in the single-brand category, the FDI policy should be relaxed completely. For this, the most important step would be to scrap the 30 per cent mandatory local sourcing clause rather than making changes on what, when, and how. If Apple or the manufacturers making its products cannot source from India, there’s no relevance of imposing the 30 per cent sourcing norm on it as a condition for setting up its stores.

 The government might decide to tinker the rules and allow third-party manufacturers to count their export procurement while calculating the 30 per cent local sourcing compliance for a foreign retailer. But such circuitous math often results in regulatory complexities. Even case by case approvals for niche and high-end companies, as was proposed earlier for players like Apple, may not be a good idea for any objective decision. 

FDI in multi-brand retail has been a sensitive issue because of the fear of job loss among mom-and-pop stores, that make up the largest chunk of Indian trade, and also a big vote bank. Single-brand is much simpler and the government can keep it that way.