Softened IKEA stance signals deal on table

Written by Timsy Jaipuria | New Delhi | Updated: Jul 7 2012, 05:41am hrs
The government and Swedish furniture major IKEA are set to arrive at a mutually acceptable solution to their dispute over the conditions set by the former regarding proposals involving foreign direct investment (FDI) beyond 51% in single-brand retail in what could set the policy benchmark in this regard.

According to sources privy to the matter, IKEA, in a revised proposal being readied, might agree that it would meet the mandatory sourcing norm in 5-7 years, a climbdown from its earlier stand that the norm could be met only over a cumulative period of 10 years.

When it announced 100% FDI in single-brand retail last January, the government had stipulated that for proposals involving FDI above 51%, at least 30% of the value of the products sold should be sourced from Indian small and cottage industries/artisans/craftsmen. IKEA had earlier said since the gestation period for its business is 3-5 years, it would not be possible to comply with this norm from day one or any time soon thereafter.

Sources said that on its part, the government might relax the condition widely seen as irrational that once the small industrial unit that goods are sourced from grows and ceases to be one with investments not exceeding $1 million, it wont qualify for the benefit of mandatory sourcing.

IKEA, which proposed the highest ever foreign investment in the Indian retail sector of Rs 10,500 crore on June 29, would clarify its position to the department of industrial policy and promotion (DIPP) within five days, the sources said. If the government, which is keen to encourage FDI flows and revive investor sentiments, and IKEA find a middle ground, that could set a precedent and help crystallise the FDI policy for single-brand retail.

Earlier, in its response to IKEA's proposal, the government said the 10-year period suggested by the company for meeting the 30% sourcing norm was 'too long'.

A government source said the DIPP was also likely to clarify in a draft cabinet note these and other issues relevant to the policy of 100% FDI in single-brand retail trading announced in January this year. In the note, the DIPP will seek suggestions from other government departments on whether the value of goods in this context should be calculated at the sourcing point or at the point of sale, over what period of time the 30% sourcing would be assessed, what constitutes a brand and how the norms would work in areas where high-precision commodities are involved, etc.

Another significant demand from IKEA is over the inclusion of the value of exports in complying with sourcing norms. Although the current policy, which says value of goods sold includes export sales as well, the government might have a rethink on this.

The DIPP's draft cabinet note will be sent to 20 different departments of the central government, seeking suggestions to how to resolve the issues. It was IKEA's proposal that triggered the review of the policy.