Delhi, 19 July 2012
government appears set to relax heavily criticised sourcing rules
for retailers, anxious not to scare off IKEA - one of the few
big name firms that has said it will invest in the country - or
any others willing to follow.
India kicked open the door to foreign retailers in January when
it removed an investment cap for single brand chains to set up
shop but then shot itself in the foot by imposing a requirement
that companies had to source 30 per cent from small local firms.
IKEA and others have balked, and the government's response is
being seen as a test case of how well it can revive flagging investor
confidence at a time when economic growth has slowed to its weakest
in nine years.
Signs point to backtracking on the part of the government, with
a top official closely involved in framing retail policy telling
Reuters that key clauses may be relaxed although the government
was still discussing the pros and cons as well as the extent of
"We are in the process of finalising our views about all
this," said the official, asking firms to "be a little
Analysts are confident there will be an easing of the rule.
"The government is in damage control mode. It realises it
has sent out a wrong signal by putting the thirty per cent sourcing
requirement for foreign retailers," said Saloni Nangia, senior
vice-president for retail at Technopak consultants.
Prime Minister Manmohan Singh this month also held up the Swedish
furniture giant's planned $1.8 billion (Rs 9,954 cr) investment
as an example of investor confidence, while the trade minister
said its already substantial amount of sourcing from India would
be taken into account.
New Delhi is also pushing to resuscitate a reform to allow foreign
retailers that sell many brands - supermarkets like Wal-Mart Stores
- to invest in the country with a 51 per cent cap on ownership.
At the moment, they are only allowed to operate in a wholesale
The government's plans were scotched last year by a political
backlash but India could launch the policy within weeks if the
political climate is right, the official involved in retail policy
"We are pushing, to the extent we can," he said. "Multibrand
retail is only a pause. There are no major issues there."
The sourcing rule for single brand retailers currently stipulates
that local suppliers must not have more than $1 million (Rs 5.53
cr) invested in plant and machinery.
The rule was designed to ensure that India's manufacturing sector,
which pales next to China's, benefits from foreign money rather
than being muscled aside by imports. But it represents a headache
for retailers looking for scale and reliable, high quality suppliers.
IKEA has asked for a 10-year window to comply with the rule -
a time frame for the government has said is too long.
"It will take us time to fully live up to the requirements,"
said Josefin Thorell, a spokeswoman for IKEA. The company has
declined to comment on how it would respond if it did not get
UK-based footwear retailer Pavers, the only other retailer besides
IKEA to apply for wholly owned operations since the rule change,
is asking that sourcing not be measured based on the value of
"Our request along with the industry is that 30 per cent
of that should be on the cost price instead," said Utsav
Seth, chief executive of Pavers' Indian operations, although he
added that Pavers would comply with the current rule if its request
In addition to ironing out these policy matters, the government
is also rethinking what to do if a supplier grows beyond its original
size. According to a policy document in November, an Indian company
would be disqualified from supplying a foreign firm if it grew
beyond its original $1 million (Rs 5.53 cr) investment.
"I would call it penalising success," said Devangshu
Dutta of Third Eyesight, a retail consultancy.
"If you are successful in actually helping small companies
grow, they would be penalised because they would not be able to
supply you any more. And you would be penalised for helping them
Another rule, one that says an investor must own the brand it
is proposing to bring to India, may also be relaxed, said the
official involved in retail policy.
This has tripped up Spain's Inditex S.A. which applied for permission
to bring a second clothing brand, Massimo Dutti, to India in addition
to its flagship clothing brand Zara.
The government has put that proposal on hold after the application
was not submitted by brand owner Inditex but by its wholly owned
unit Zara Holdings BV.