30% clause in retail FDI for locals, govt clarifies

Written by fe Bureau | New Delhi | Updated: Nov 29 2011, 08:31am hrs
Global retail brands looking to set shop in India under the latest policy decision on allowing 51% FDI in multi-brand and 100% in single-brand retail will have to source 30% of their raw-materials from Indian micro and small enterprises (MSEs) and not from micro and small industries located globally.

The government came out with a clarification to this effect on Monday as this was not clear in the official communication issued after the Cabinet decision on Friday.

The ministry of commerce and industry said, "Sourcing of a minimum of 30% from Indian micro and small industry having capital investment of not more than $1 million has been made mandatory. This will provide the scales to encourage domestic value addition and manufacturing, thereby creating a multiplier effect for employment, technology upgrade and income generation."

Earlier, the policy had said: "Thirty per cent sourcing is to be done from micro and small enterprises which can be done from anywhere in the world and is not India specific."

Interestingly, sources say MSME minister Virbhadra Singh had opposed this very point during the Cabinet meeting held on November 24. He said to have pointed out that foreign retailers could do 30% of their sourcing from MSEs which can be done from anywhere in the world as it was not India specific.

It was only after the opposition in the Cabinet meeting that the government decided to include India-specific clause. However, on Friday, the press backgrounder did not take note of the changes, sources said. According to a senior DIPP official, a similar reservation on the matter was also made in the Committee of Secretaries consultations held in June. Since India is a signatory of WTO the policy could not have kept the sourcing India specific, the official said.

Technically, this rider may violate the Trade Related Investment Measures agreement and Most Favoured Nation obligations of the World Trade Organisation (WTO). However, on Monday, the department changed their stance and said that since WTO talks only of trade in goods and multi-brand retail is a service, India would not be making any WTO violation.

Reacting on this, commerce and industry ministry Anand Sharma said, "No, no that was misconstrued (in the Cabinet)." Sharma added that 30% of the sourcing has been made mandatory from Indian MSEs. He said this provision of procuring from Indian small units will not violate WTO obligations. "We have taken a decision ... we did it for solar mission and telecom sector and we have deliberated upon it. It is important ... it will create jobs, give a fillip to manufacturing of micro and small industry," Sharma said.

The policy was criticised by various global trade unions and SME organisations saying that the mandate of at least 30% from SMEs across the world will have serious repercussions for jobs in both the manufacturing and services sectors. Global supermarkets such as Walmart and Tesco stand to gain at the expense of Indias millions of small traders and workers who are part of the domestic supply chain.

Even president of Federation of Indian Small and Medium Enterprises V K Aggarwal said that the policy has come as a shock to us. It makes no sense at all. Indian government is not supposed to take care of the MSEs of entire world and it will have adverse impact on Indian MSME.