The government is weighing options to relax the mandatory 30% local sourcing rule for single-brand retailers with 51% or more foreign direct investments (FDI) to make it more attractive for them to set up shop here, an official source told FE.
The options being toyed with include trimming the mandatory sourcing requirement to around 15-20% or counting foreign retailers’ purchases in India for their global operations as part of their local sourcing obligations, said the source.
If implemented, the move will help multinational companies — including Apple, Ikea and H&M — that are planning to either start or ramp up operations in India. While iPhone maker Apple has sought exemption from the sourcing rule, among other conditions, to start manufacturing in India in a big way, Ikea is planning to set up its first store in Hyderabad in April 2018. H&M is reportedly looking at increasing the number of stores to 25 by the end of 2017 from around a dozen and a half now.
“These (options to relax the rule) are at a discussion stage and nothing has been finalised yet. Sensitivity of various stakeholders would also be taken into account and then a proposal would be finalised,” he said. Commerce and industry minister Suresh Prabhu will take a decision once a formal proposal is prepared, he added.
Some of the foreign companies have told the government that local sourcing rule hinders not just setting up of single-brand outlets, but also expanding operations.
The department of industrial policy and promotion (DIPP) had in 2013 rejected a demand of Ikea to be able to count local purchases by the company for their global operations as part of the mandatory sourcing obligations. However, with a change in the government and subsequent liberalisation in the FDI policy, the demand for easing the rule gained momentum. Even NITI Aayog is learnt to have backed such an idea.
However, the government is conscious of the fact that any change in the rule must not potentially upset the Make in India programme, he said. Even the business of local companies, mainly small and medium enterprises, which have built an ecosystem in certain manufacturing segments shouldn’t be hampered. So, any change in local sourcing rule will hinge on how the government finally balances these conflicting interests without upsetting the interest of the SMEs.
At present, FDI up to 100% is permitted in single-brand retailing — up to 49% through automatic route and via government approval beyond that ceiling. The local sourcing norm is applied when FDI in an entity exceeds 51%.
According to the FDI guidelines, “the sourcing of 30% of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors”. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked by statutory auditors. This procurement requirement has to be met, in the first instance, as an average of five years’ total value of the goods purchased, beginning April 1 of the year of the opening of the first store. Thereafter, it would have to be met on an annual basis.
Last year, Apple’s application for setting up stores in India was rejected by the finance ministry over the sourcing conditions. However, to help companies undertaking single-brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible, the government has stipulated that sourcing norms will not be applicable up to three years from the opening of the first store.
Even in 2012, after allowing 100% FDI in single-brand retail, the UPA government had altered the norms from “mandatory sourcing from local small and medium enterprises” to “mandatory sourcing from India, preferably from MSMEs”.