Under pressure from overseas investors, the department of industrial policy and promotion (DIPP) may soon come out with further clarifications on the ?mandatory 30% sourcing from SMEs? clause in the recently allowed 100% FDI in single-brand retail. This comes after several foreign brands raised questions about the status of SMEs over a period of time. Experts said the absence of a clarification on the matter may have led to negligible inflow of FDI in the single-brand retail despite the government nod to the policy. This is causing concerns for DIPP.
A senior DIPP official told FE that a formal clarification may feature in the forthcoming FDI review due on March 30. ?The government has given a clarification that the 30% sourcing from SME should be only at the entry point as business will carry on as usual even the SMEs lose their status?.
According to a senior executive which represents a leading foreign brand, the status of a current SME may change in future thereby impacting the players. ?The small and medium enterprises (SMEs) will grow with flow of investments in course of time thus moving out of their small scale status. What happens then? Will a foreign brand need to change the sourcing to a different SME?,? the executive quoted above said.
According to one analyst, in the absence of a clarification, the investor would be left with only two options: Either switch to another SME or reduce investment to 51%. ?Once apprehensions are clarified, it would help global fashion brands especially from Italy and France to strengthen their interest in the growing Indian market,? the analyst said.
But government is confident that once clarifications are communicated, there will be a substantial hike in FDI in single brand retail sector. ?We are constantly in a process to increase FDI investment in the country. The DIPP was expecting that investment in single brand retail will substantially increase once the sectoral cap is relaxed to 100% but none of the investors have shown interests sans a clarification on the SME clause,? the official said.
In January, the government notified its decision of allowing 100% FDI in single-brand retail, paving way for global chains like Ikea, Adidas, Louis Vuitton and Gucci, to name a few, to have full ownership of their India operations. However, in respect of proposals involving FDI beyond 51%, the mandatory sourcing of at least 30% would have to be done from the domestic small and cottage industries, which have a maximum investment in plant and machinery of $1 million (about R5 crore).
Commerce and industry minister Anand Sharma had then said that FDI in single brand has led to emergence of some global majors in Indian market and the new relaxation will provide stimulus to domestic manufacturing value addition and especially help in technical upgradation of small industry.
Many big brands have already set up their operations in the country by partnering with Indian partners. The new policy would allow them to buy out the domestic partners. Though 51% FDI in single brand was allowed in February 2006, not much investment has come in the sector. During last three and half years, FDI worth only $45 million was received in the sector.