SME sourcing clause in retail FDI could change

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When it comes to the definition of SME, we need to have a relook, said Anand Sharma. When it comes to the definition of SME, we need to have a relook, said Anand Sharma.
Summary'When it comes to the definition of SME, we need to have a relook.'

The government will address the restrictive clause which requires foreign multi-brand retailers to compulsorily source 30% of the value of their manufactured products from small and medium enterprises (SMEs).

Commerce and industry minister Anand Sharma told FE that he was aware of the problem and has taken it up with the finance minister. “...When it comes to the definition of SME, we need to have a relook. I have discussed with the finance minister and it's very clear at least in my mind that you can't have expansion and contraction. Today, if you are an SME and become integrated into the sourcing structure, you grow bigger than $1 million and then get out next year. We will address that issue and there will be greater clarity. We will resolve it like we have done in other issues,” Sharma said.

Pointing out how issues were resolved in the single-brand sector, Sharma added: “The same question was asked to us in single-brand retail and you have seen that it has happened. Now, we have big proposals, there is a continuous stream that is coming. Salisbury and Tesco have already applied to set up and establish big sourcing bases here.”

The clause that mandates sourcing only from SMEs with investments in plant and machinery are not above $1 million has prevented foreign retailers like Wal-Mart and Tesco from opening retail outlets, even after a change in rules allowed them to hold up to 51% stake. The deterring part in the clause is that once their value exceeds the limit as they grow by supplying to foreign retailers, they have to be out of the partnership.

Foreign retailers are not averse to sourcing from SMEs. However, they complain that once they have invested in such companies, they would grow in size, making them ineligible to be a supplier. So, the retailers will have to routinely change partners, rendering their investment and training worthless. Acknowledging this fact, Sharma said: “I think they realised that India is a very important sourcing base and SMEs do play a role. Though when it comes to the definition of SME, we need to have a relook.”

A similar clause was present in the single-brand retail sector as well where the government allowed foreign firms to set up 100% subsidiaries against the earlier cap of 51%. However, when Swedish furniture maker Ikea, which was keen to invest in the country, pointed out the anomaly, the government amended the regulations. Thus, in single-brand, the “mandatory” 30% sourcing from SMEs has been changed to “preferably” and the clause on $1 million has been removed.

Asked why no foreign firm has shown interest in multi-brand retail when several have come forward in single-brand retail and two foreign airlines have expressed interest in aviation, Sharma said: “It was only in December that finality was reached in the Lok Sabha and the Rajya Sabha. Thereafter, there has been very enthusiastic response and interest. Now, business decisions have to be made by business people. We have allowed only 51%; so the big retailers were already sourcing up to $1 billion or £500 million sterling from India.”

“Now, they will come up with the business proposals. They met me in Davos – chairman of Tesco and chairman of Wal-Mart. In business decisions of this magnitude, we are talking of hundreds of millions of dollars and in some cases billions of dollars. They do take time. When they put together their whole proposal, things will move. What is important is that there has been a very firm reaffirmation by India through these policy decisions, complex and difficult as they were. We have a biding commitment to the reforms agenda to open up a welcoming environment for the foreign investors,” Sharma said.

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