Clause on 30% sourcing from Indian SMEs a particular concern.
The single-brand retail story is expected to have many more twists and turns, as American companies in this space are preparing to initiate talks with the authorities and other stakeholders to sort the regulatory issues in the policy. European firms, represented by business advisory groups, are also expected to engage in dialogue with the government on this.
While the government notified its permission last week for up to 100 per cent foreign direct investment (FDI) in single brand retail, it put in the condition of 30 per cent sourcing from Indian small and medium scale industries by foreign majors.
| CLAUSE OF WORRY * The condition will pose a hurdle for those wanting to enter India, without local partner * Many American brands, including GAP and Abercrombie, want to set up shop in India, dodging the local partnership route * Other global brands waiting to enter include Ikea, Prada, Hennes & Mauritz, and Arcadia * USIBC, member-companies would engage with stakeholders to understand the conditions |
Global brands, especially in the luxury clothing and furniture category, may find it tough to comply with the 30 per cent sourcing clause, experts have said. The condition will pose a hurdle for those wanting to enter the India market on their own, without a local partner. The 30 per cent sourcing clause kicks in once the 51 per cent FDI limit, the single-brand retail cap till the policy change, is exceeded.
Anku Nath, director for trade policy advocacy at the US-India Business Council, told Business Standard, “The Dipp (department of industrial policy & promotion) press note included provisions which merit further consideration by industry, including the mandatory sourcing of 30 per cent of product sold value from small industries.”
According to Nath, the USIBC and member-companies would engage with all relevant stakeholders to better understand this and other conditions. “This policy has the potential to be a true benefit to the Indian economy, as new investors consider entering the market and existing investors consider expanding operations,” Nath added. USIBC is a business advocacy group for American companies in India.
Many prominent American brands, including GAP and Abercrombie, want to set up shop in India without getting into the local partnership route. Other global brands waiting to enter include Ikea, Prada, Hennes & Mauritz, and Arcadia. Among the global retailers already present in India either through franchisee or local JVs are Louis Vuitton, Christian Dior, Jimmy Choo, Zara, Marks & Spencer and Canali. French luxury brand Christian Louboutin got the government nod recently to operate in India.
Arvind Singhal, founder of Technopak Consultancy, argued, “It may be possible in food and grocery to source 30 per cent from Indian small and medium enterprises (SMEs). But what about categories like clothing, home products, furniture and pharmaceutical?” How can you source from small businesses there, Singhal asked.
On the rollback of the multi-brand FDI decision, USIBC said it remained disappointed. “But we respect the political process within India which underpins its vibrant democracy and decision making process. We believe strongly that allowing foreign investment into multi-brand retail will eventually happen,” Nath said.
The commerce ministry is in consultation with stakeholders, including industry, small retailers and farmers, for reviving the multi-brand retail FDI decision. Deliberations on the policy are also expected during finance minister Pranab Mukherjee’s coming visit to the US. On November 24, the Union Cabinet had decided to allow up to 51 per cent FDI in multi-brand retail and increase the foreign investment level to 100 per cent in single-brand. It was then forced to keep in abeyance the multi-brand FDI decision, due to political opposition. On single-brand, it waited for the Parliament session to get over before notifying the policy.
The latter notification says any foreign retailer coming to India with over 51 per cent FDI in the single-brand category must source at least 30 per cent of value from Indian SMEs. The issue had turned controversial after a press statement by the commerce ministry had stated that foreign retailers could source from SMEs across the world.
