IKEA?s entry comes with riders, govt may finetune FDI policy

The entry of Swedish furniture giant IKEA, under the relaxed FDI regime in single-brand retail, may become a test case for the government on the 30% mandatory domestic sourcing clause.

The entry of Swedish furniture giant IKEA, under the relaxed FDI regime in single-brand retail, may become a test case for the government on the 30% mandatory domestic sourcing clause. This is because IKEA, which announced a R10,500-crore investment plan for India on Friday, wants a host of relaxations. The government, in all probability, will comply.

For example, IKEA wants the government to consider a cumulative period of 10 years to arrive at the value for the mandatory 30% domestic sourcing from local small and medium enterprises. ?The gestation period for a typical IKEA retail store is 3-5 years and it would not be possible for the group to meet this clause from day one or anytime soon thereafter,? IKEA told the government in its application.

IKEA also wants the the export value of materials sourced from Indian micro, small and medium enterprises (MSMEs) to be included. ?Adherence to the mandatory-sourcing requirement be computed, certified and checked for cumulative periods of 10 years each from the date of approval of the proposal by the FIPB and the sourcing values would include the export values of sourcing by the IKEA Group companies from the small industries, etc,? it told the government.

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In simpler terms, this means IKEA can source raw materials from domestic MSMEs but export it to other markets. It wants the value of such exports to be clubbed together, with the materials used for goods sold in India, to arrive at the 30% norm.

In January, the government notified the FDI policy in single-brand retail, allowing up to 100% foreign investment. However, all applicants who enter India under this policy will be required to source at least 30% of their materials from Indian MSMEs. This clause, however, has been opposed by several foreign retailers.

The government is said to have agreed to relax the fine print in order to allow a smooth entry to overseas retail giants like IKEA, sources in the commerce ministry said.

According to officials in the Department of Industrial Policy and Promotion (DIPP), the nodal agency handling policy issues pertaining to FDI, inter-ministerial discussions have already begun between the commerce ministry and the MSME ministry. ?We have already started the inter-ministerial discussion with MSME ministry and we are hopeful of coming out with a solution soon,? a DIPP official told FE.

The IKEA application also seeks to derive the quantum of 30% sourcing requirement based on the purchase value of the products and not the value at which products are sold to the end consumer.

IKEA has pointed out the various costs incurred, including taxes, duties, logistics, transportation costs, warehousing and storage costs, marketing costs, administrative and overhead costs, saying it will include these in the domestic sourcing cost. The government, it feels, should agree with this.

Since the policy does not offer clarity on the size and definition of MSMEs, IKEA says it the unit that it currently sources from becomes a large-scale industry, then it will continue to source from the same entity.

Experts said the detailed queries and clarifications sought are indicative of the assurances being sought from the government. ?I suspect the government has given some guidance to IKEA in terms of future clarity on domestic sourcing clause. It is evident from their application,? said a consultant.

IKEA spokesperson Malin P Beckeman said in a statement on Friday: ?In the longer term, however, the mandatory sourcing of 30% of the value of goods sold in India from domestic small industries remains a challenge. It is therefore important that the definition of small industries in the future is reviewed and provides flexibility.?

Earlier this year IKEA had postponed announcing its plans to enter India citing that ?the conditions applied to local sourcing from MSMEs might be difficult for it to live up to?. IKEA had also requested the DIPP to expeditiously process their application and present the same before the FIPB for the government’s consideration.

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First published on: 25-06-2012 at 03:14 IST