The Finance Minister Nirmala Sitharaman today proposed relaxation on local sourcing norms in foreign direct investment (FDI) in single-brand.

This proposal is likely to be good news for single-brand retailers such as Ikea, H&M, and ones in the queue such as Apple. More brands may join the queue if the relaxations are significant.

“Global FDI flows slid by 13 percent in 2018 to $1.3 trillion from $1.5 trillion, as per the world investment report. India’s inflows remained strong at $64.37 billion marking a 6 percent growth over the previous year. I propose to further consolidate the gains in order to make India a more attractive FDI destination,” the Finance Minister Nirmala Sitaraman said in her budget speech.

She added, “Local sourcing norms will be eased for FDI in the single-brand retail sector.”

A single-brand retailer is expected to sell all the products under only one label across its stores. Think Levi’s, Starbucks or Ikea, while a multi-brand retail store is like a typical Big Bazaar which sweeps many brands under one roof.

Currently, the FDI policy allows 100 percent foreign investment in single-brand retail under the automatic route but requires an investor to source 30 percent preferably from MSMEs, village and cottage industries, artisans and craftsmen.

This sourcing requirement has to be met, in the first instance, as an average of five years’ total value of the goods purchased, starting April 1 of the year of opening of the first store.

Thereafter, it needs to be met on an annual basis. Single-brand retailers were not allowed to set off annual incremental procurement from India for their global operations against the domestic sourcing requirement after five years.

While there was a recent relaxation provided to offset the sourcing from India for global operations against the local sourcing, the same did not have the expected impact to boost FDI in the sector.

Paresh Parekh, Partner and National Tax Leader, Consumer Products and Retail, EY India, said, “There was a lot of reluctance by the existing foreign JV players in the sector to increase FDI beyond 51 percent to avoid coping with the sourcing norms and also reluctance shown by new foreign brands to enter the sector owing to the sourcing norms.”

Welcoming More Players

Retail experts said this move will not only open gates for more brands to enter India but also be positive for the existing players.

“Budget proposal to relax the local sourcing conditions in the sector should have a big positive impact for the existing players and also to the sector owing to the new FDI which should now enter the sector,” Parekh added.

Echoing Parekh’s view Anil Talreja, Partner, Deloitte India said while it would the impact will largely depend on the exact details of the relaxation of sourcing the announcement has clearly laid out the carpet once again for the global single-brand retail companies in India.

“Many of these companies were sitting on the border in a dilemma to invest or not in the Indian market on account of the difficulty in meeting these sourcing conditions. These companies will certainly have to relook at their strategy to tap the large Indian consumption potential. It would now be a race for all these retail companies to evaluate the conditions and take a quick decision to invest in India.”

Cupertino-headquartered company Apple Inc was planning to open up its branded Apple Stores in India. However, in the last couple of years, the iPhone maker was unable to launch its flagship branded stores on the back of a norm which required at least 30 percent of a single brand retail firm products to be sourced locally.

“More companies in the fashion and electronics space are looking to set up shop in India. This move removes the roadblock,” said Anshuman Singh, the Chairman & Managing Director of Stellar Value Chain Solutions.

Relaxing local sourcing norms will help grow the ancillary industry to single brand retail brands.

Ancillary industry creating large scale jobs through foreign brands locally has huge success rate with automobile industry in India, with the likes of Maruti Suzuki, Hyundai, Ford Motors, Renault etc. manufacturing in India for local consumption as well as exports.

Source: Moneycontrol