Under the current local sourcing norms, the government mandates foreign companies investing beyond 51% in single-brand retail trading in the country to locally source 30% of the value of products sold.
In a move that may be a boost for hi-tech companies like Apple, Samsung, etc., the government is likely to formulate a separate policy for electronics to attract higher foreign direct investment (FDI) and make the country an export hub. This means electronics will not form part of the easing of the 30% local sourcing norms for single-brand retail, about which finance minister Nirmala Sitharaman spoke in the Budget. For all practical purposes, no mandatory local sourcing norms may apply for electronics companies which make manufacturing bases in the country for export purposes.
Analysts said sectors other than electronics may be clubbed together as single-brand retail and the new, eased 30% sourcing norms would apply to them. “Electronics has an issue of imports. It is the third-largest category that eats up into our forex,” said Ankur Bisen, senior vice-president at Technopak Advisors. Bisen said the government should also mull extending the three-year period exemption, currently provided to companies undertaking retail trading of products having state-of-the-art technology, for sourcing products domestically. A move to this effect will give such companies more time to develop their factories and network of vendors in India.
Under the current local sourcing norms, the government mandates foreign companies investing beyond 51% in single-brand retail trading in the country to locally source 30% of the value of products sold. However, this procurement requirement needs to be met in the first instance as an average of five years’ total value of goods purchased, beginning April 1 of the year of the opening of first store. Thereafter, it would have to be met on an annual basis. To pacify firms like Apple, which have been seeking relief in sourcing norms, government in 2018 exempted companies undertaking retail trading of products having state-of-the-art and cutting edge technology from sourcing products domestically up to three years from start of the business.
To capitalise on the ongoing trade war between the US and China, a panel formed by the Prime Minister’s Office (PMO) is understood to have engaged with global electronics majors like Apple and Samsung to get the companies’ feedback on their requirements to set up manufacturing and export hubs in India, according to media reports.
Kishore Joshi, head of regulatory practice at Nishith Desai Associates, said the government may gradually phase out the 30% local sourcing norm. Joshi said initially companies bringing cutting-edge technology may be given this relaxation and gradually it may be extended to other entities. Joshi, however, added that if the government relaxes the 30% sourcing norms across all the sectors, it may impose certain conditions on the companies — they may be asked to create a certain level of jobs or may be directed to bring in technology and minimum forex to boost the Indian economy.
“The whole purpose of imposing this restriction of local sourcing was to boost the Indian MSMEs. Hence, the government may not like to remove this restriction at one go, but may do it over a period of time looking at various factors such as effect on Indian retailers, increase in flow of FDI, potential to get more forex,” said an analyst on condition of anonymity.
Swedish furniture maker IKEA and fashion-retailer H&M are some of the big single-brand retail firms operating in India. Easing of local sourcing norms for FDI in single-brand retail has the potential to attract close to $1 billion in FDI inflows over the next three to five years, said Atul Pandey, partner at Khaitan & Company. Analysts noted that easing of the norms will encourage foreign companies to take the investment route to enter India and not the franchise route that is more favoured at present.
FDI equity inflows into India stood at $44.36 billion in the year to March, marginally lower than $44.85 billion in FY18, according to provisional data released by DPIIT. A source said there were two lines of thinking within the government. While the ministry of finance is pitching for complete withdrawal of the local sourcing norms, the commerce ministry is of the view that the current cap should be eased but not removed. Some experts said the government should not account for exports within the local sourcing norms.
At present, for the initial five years beginning April 1 of the year of commencement of business, foreign companies are permitted to ‘set off their incremental sourcing of goods from India for global operations against the mandatory sourcing requirement of 30% of purchases from India’. Following the completion of five-year period, companies will have to meet the 30% sourcing norms towards its India operation on an annual basis.
“Foreign companies entering India in single-brand retail trading would already have presence globally. Hence, using India as a source of origin for exporting products to these countries may not always be a viable option for them unless the quality of Indian products is really good as compared to that of other countries,” said an analyst.
In 2012, the government allowed 100% FDI in single-brand retail under government approval route. In January 2018, the government allowed up to 100% FDI in single-brand retail via automatic route, scrapping the need to seek its approval beyond 49%.