NEW DELHI: The government may relax the condition of mandatory 30% sourcing from small local enterprises for foreign luxury multi-brand retailers even as the Cabinet has eased the norm only for single-brand retailers, a senior official told ET.
The move comes amid an appreciation within the government that while foreign supermarket chains such as Walmart and Tesco, which sell a wide variety of goods, may not find it difficult to meet the condition of local sourcing, this is unlikely to be the case for high-end retailers looking to sell only luxury goods.
"If we get applications from luxury multi-brand retail stores that are genuinely not in a position to source from the small sector, we could consider a case-by-case relaxation. We are looking at the possibility," said the official, who requested not to be named.
Most multi-brand retailers are in a better position than single-brand retailers to source their wares partly from the domestic micro, small and medium enterprises or MSMEs as they sell a variety of low-end products, including food items and other household goods. However, this does not hold true for luxury retailers.
"Thirty per cent sourcing from MSMEs will be a deterrent for multi-brand retailers operating in luxury segment," said Abhay Gupta, founder and chief executive of Luxury Connect, "There is need for more clarity on what the government has decided and we need to understand the fine print to know what implications this clause will have on luxury retailers."
Full text of government reforms on: Multi brand retail | Single brand retail | Civil Aviation
The Cabinet on Friday cleared 51% FDI in multi-brand retail and relaxed the 30% domestic sourcing requirement for single-brand retailers by allowing sourcing from Indian companies of any size. It, however, decided to retain the condition of compulsory sourcing from small companies for multi-brand retailers.
High-end multi-brand foreign brands that do not pose a threat to any segment in India are likely to stay away unless the government provides flexibility on sourcing, experts say.
"We have to be practical in our policymaking. There is no doubt that retailers such as Walmart will not have any problems in sourcing their papads and pickles and potatoes domestically from the small sector," said Arpita Mukherjee of Icrier who carried out a detailed study on the impact of FDI in retail on India, while pointing out, "But for sellers of luxury items such as high-precision watches or jewellery or for that matter speciality dairy products, it will pose a serious problem."
Mukherjee said the government must also bring about clarity on what will happen to the small sector suppliers when they overshoot the definition of MSME after becoming suppliers for multi-brand retailers.
"When a large foreign multi-brand company starts sourcing, say papads, from the small sector for all their Indian stores, the suppliers will no doubt have to invest more in their infrastructure and hence may not fall within the small bracket for long. What happens to them? The government may end up discouraging economies of scale," she cautioned.
The Cabinet also relaxed the ownership clause for FDI in single-brand retail that required the investor company to also own the brand. This will help fast-track pending applications of brands such as Massimo Dutti and Promod.
As per the changed policy, any one foreign investor, whether owner or not, will be allowed in single-brand retail as long as there is a valid franchisee agreement with the brand owner.
"This step is long overdue and will enable global companies to implement their international structures in India as well. This will go a long way in improving retail investor sentiments," said Vineet Anjeja, partner at law firm Clasis Law and counsel for Major Brands, which co-owns Modex Trading, the Indian franchisee of Promod.
"Let's just hope that the press note is issued at the earliest by the government so that the actual investment process can begin," he said.
In June, the Foreign Investment and Promotion Board, which approves investments in sectors that are not on the automatic list, had turned down an application by Zara Holdings Netherlands to bring in the high fashion line of Massimo Dutti to the country.
The government is likely to further relax the rules for FDI in single-brand retail to allow the mandatory 30% sourcing from India over a period of time.
With the current policy seems to indicate that the clause has to be complied with from the beginning, Swedish retailer IKEA had wanted it to be applied over a period of time.
The Department of Industrial Policy and Promotion is expected to include this relaxation in its final guidelines.
(With inputs from Shruti Choudhury)
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