New Delhi: The Union cabinet on Wednesday allowed 100% foreign direct investment (FDI) in single-brand retail without prior government approval and liberalized local sourcing norms— steps that could benefit companies like Swedish furniture retailer IKEA of Sweden AB and fashion house Hennes and Mauritz AB (H&M).

Although 100% FDI is already permitted in single-brand retail, only up to 49% was allowed through the so-called automatic route and investment above that needed government approval. Wednesday’s decision smoothens the way for new entrants to start retail operations in the country.

The cabinet eased the local sourcing rule for foreign single-brand retailers; such entities are not required to meet the 30% target for local sourcing by their Indian units for five years if they are already doing so for their global operations, it said. So far they have been required to source locally 30% of the value of goods purchased for their Indian business initially as an average of five years; later they were required to meet the requirement on a yearly basis.

IKEA, which has ambitious business plans for India, and H&M are among the potential beneficiaries of the new sourcing norms.

The government did not define the ‘state-of-the-art’ and ‘cutting-edge technology’ it has previously said would be required of high-tech companies to open single-brand stores. The current FDI policy says that local sourcing norms will not apply for up to three years after the opening of the first store for single-brand retailers of products having ‘state-of-art’ and ‘cutting-edge’ technologies and where local sourcing is not possible. The government has rejected the application of Apple Inc. to open stores under that provision, holding that its technology is not ‘cutting edge’.

In August, the government set up a committee under department of industrial policy and promotion (DIPP) secretary Ramesh Abhishek to clearly define these two terms. The recommendations of the committee have not been made public yet.

Retail experts hold that while the FDI relaxation will remove entry barriers for foreign single brand retail companies altogether, more important concerns regarding local sourcing and FDI in multi-brand retail remain.

“It (the relaxation) is not a very big deal because the problem in single brand retail has not been with the clearance process but with the sourcing norms," said Arvind Singhal, chairman at consulting firm Technopak Advisors Pvt. Ltd. “Even the new decision regarding the sourcing will not make much of a difference and will benefit only a handful of companies. Because of the 30% sourcing norms, a lot of foreign companies face problems and may not look at India as a potential market."

Aashish Kasad, India region tax leader for consumer products and retail at EY India, said there had been an expectation of the government liberalizing FDI norms for multi-brand retail to enable large international retailers to invest and in India bring the latest technologies and retail formats to the country. That remains an unfinished part of the agenda.

Goldie Dhama, partner at PwC India, said the liberalisation of norms was a progressive move in the direction of improving the ‘ease of doing business’ in India. “Allowing incremental sourcing undertaken by overseas group companies to be counted towards the 30% sourcing commitment for the initial five years will provide single-brand retail trading companies the flexibility and time to align their retail and sourcing business," he said.

Large global retailers would be seriously considering entering India or accelerating their entry plans because of the new sourcing rule.

“We will see more fashion, beauty and personal care, baby product brands coming to India as well as existing brands strengthening their position. This new development would strengthen their business case for India entry," he added.

Soumya Gupta from Mumbai contributed to this story.

Close