New Delhi: In a clear rush to send the right signals to foreign investors ahead of finance minister P. Chidambaram’s overseas roadshows, and trade minister Anand Sharma attending the World Economic Forum at Davos, both ministries sorted out their differences to clear Swedish furniture maker Ikea’s proposal to set up stores in India leaving its global business model unchanged.
While Chidambaram is starting his roadshow in Hong Kong on Tuesday to attract foreign investors to India, Sharma will be meeting global business leaders at Davos on Wednesday and Thursday.
A commerce ministry official said Sharma had been insistent that the proposal be cleared before he left for Davos on Tuesday. The official didn’t want to be named.
The approval on Monday came as a surprise. On Friday, the Foreign Investment Promotion Board (FIPB), which clears overseas investment proposals, had said its meeting scheduled for 18 January would be held on 24 January (Thursday). The Ikea proposal had been listed as an additional item on the agenda for the meeting.
While Ikea’s original proposal involved an initial investment of €600 million (around Rs.4,300 crore) for opening 10 stores in India out of its total plan of investing €1.5 billion, the proposal that was cleared involved the full amount for opening 25 stores. An Ikea spokesperson confirmed that the investment proposal cleared on Monday involves more than Rs.10,000 crore.
Another government official said FIPB had allowed Ikea to follow its global business model and open cafes within its furniture stores, famous around the world for the meatballs on the menu. The Ikea case will now be taken up by the cabinet committee on economic affairs as it involves an investment proposal in excess of Rs.1,200 core.
Ikea said the approval was an important milestone in the application process.
“We consider this as a very positive development. We are now awaiting for approval from the cabinet and subsequently a notification so that we can initiate the process of establishing Ikea stores in the country,” Ikea Retail India country manager Juvencio Maeztu said in a release.
Sharma also hailed the FIPB clearance in a statement.
“The government is committed to play a constructive role in encouraging FDI (foreign direct investment), specially in areas which create jobs and provide technological advancement. Globally, Ikea has a business model which integrates in its embrace SMEs (small and medium enterprises) and domestic industry, making them a part of the global value chain,” he said.
The approval will help attract investment, since there are a great deal of opportunities in the retail sector, said Amitabh Mall, partner and director at Boston Consulting Group.
However, he cautioned that no single investment will set the ball rolling. “Those who have exposure to India and are ahead of the curve will be quicker to move, and those who don’t will now look actively. But this definitely sends out strong signals and greater confidence for those looking at applying themselves to the Indian market,” he said.
Kanchan Lall, associate vice-president at Tecnova, an India entry strategy firm that works with foreign retailers, said her clients have adopted a “wait and watch” approach.
“Prospective clients, those who are talking to partners and on the verge of signing contracts, need a few more examples of big-ticket investments like Ikea just to be sure that there is no uncertainty in the policy,” she said.
Ikea’s proposed investment had become a test case for the entry of single-brand foreign retailers into Asia’s third largest economy. While FIPB had cleared Ikea’s proposal in November, it had significantly pruned the list of items that it could sell and had barred it from opening restaurants within its furniture stores, going by the strict definition of single-brand retail trade notified by the government.
In June, the Swedish company had announced that it would, through its subsidiary Ingka Holding Overseas BV, invest €1.5 billion to open 25 stores in India.
In January 2012, the government allowed 100% FDI in single-brand retail, but the response from overseas retailers was tepid because of conditions such as a requirement to source 30% of content from the small-scale sector. However, the government made this optional in September, while opening the multi-brand retail sector to foreign supermarket chains.