The government is likely to raise the bar on foreign direct investment (FDI) in single-brand retail by proposing a hike from 51% to 100%, but it may not make much sense for players except a few like furniture-maker IKEA to set up shop in India.
Strict riders like a minimum of 30% sourcing from SMEs, cottage industries and villages according to experts will be another roadblock for foreign retailers to enter the Indian market.
The Cabinet note floated by the department of industrial policy and promotion (DIPP) proposing the increase in the FDI limit said: ?In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen.? The note also goes on to define the ?small industries? saying, ?industries which have a total investment in plant and machinery not exceeding $0.25 million.
DIPP has also proposed a caveat that the valuation refers to the value at the time of installation (of the plant and machinery) without providing for depreciation. It adds: ?if at any point in time, this valuation is exceeded, the industry shall not qualify as a ?small industry? for this purpose. The compliance of this condition will be ensured through self-certification by the company, which could be subsequently checked, by statutory auditors, from duly certified accounts, which the investors will be required to maintain.?
Sources say that the step comes in the wake of a large number of European companies having requested the industry ministry for a relaxation in the cap, which will allow them to set up shop in India.
A DIPP official told FE, ?A lot of companies across all sectors, be it apparel or furniture have approached us requesting a relaxation of FDI cap from the current 51% to 100%. European companies especially have put in a request as the current policy does not suit their business model to set a shop in India.?
The official added: ?IKEA is one of those who had urged the government to hike the FDI limit in single-brand retail as IKEA sources almost 30% of its products from India. It will create jobs in India.?
IKEA?s CEO Mikael Ohlsson also met commerce and industry minister Anand Sharma in September seeking further liberalisation of ownership norms in single-brand retail, the official said.
Thomas Varghese the chairman of the CII Committee on retail says, ?brands under sectors like luxury, electronics might not be able to come if such sourcing riders are being proposed as they have their own sourcing in place meeting their global standard of products.?