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Budget 2019 : Are relaxed sourcing norms for single-brand retail sign of a bigger thaw? 

Moneycontrol , Jul 08, 2019

Finance Minister Nirmala Sitharaman, in her maiden Budget for 2019-20, has proposed to relax sourcing norms for foreign-owned single-brand retailers.

There is a reason behind it.

Currently, single-brand retailers with more than 51 percent foreign ownership have to source 30 percent of their products locally. The sourcing norms were imposed to boost home-grown small and medium enterprises, village and cottage industries, local artisans and craftsmen. But the response to this route into India’s retail market was unenthusiastic.

Foreign investment in single-brand retail did not see much improvement from the days when India permitted up to 51 percent foreign direct investment (FDI). During 2000-18, India received a total of $1.4 billion of foreign investments in retail (all retail), just 0.36 percent of the total FDI inflow, according to data available with the Department of Industrial Policy and Promotion.

Sitharaman’s latest proposal may change that.

Companies such as Apple could benefit. The technology giant recently announced plans to open its first company-owned and managed retail store in India. A relaxed sourcing requirement could encourage it increase its presence.

Retailers such as IKEA too will be able to rework their offerings with more global products. For Apple in particular, while it does make some of its products locally, a strict sourcing condition could limit the models it can offer. Relaxed norms could see it going full throttle to gain a bigger share of the Indian smartphone market.

Could the relaxation in local sourcing hurt local producers? In the short-term, it could. But success in the marketplace is always linked to quality and pricing. If local companies are able to offer the desired quality at a reasonable price to global companies, there is no reason why foreign retailers would not buy locally.

In the apparel sector, retailers such as H&M and GAP have been sourcing locally, and some of the locally sourced products are even sold globally.

While the revised sourcing norms are not known yet, the government’s move should make the Indian retail market more attractive for single-brand foreign retailers. This relaxation does raise the question of whether India could also look at relaxing the foreign investment policy in multi-brand retail. At present, India permits up to 51 percent FDI in multi-brand retail.

Industry lobby groups such as Federation of Indian Chambers of Commerce and Industry (FICCI) and Confederation of Indian Industries (CII) have been asking for a relaxation.

Interestingly, the ruling government in its earlier tenure has allowed 100 percent FDI in food retail during its previous term, according to a report by Business Standard.

It’s common knowledge that India’s policy on retail FDI is complex, if not highly complex. Rules for physical retail are different from online, and even the guidelines are different for companies engaged in food retailing. Besides, wholesale and consumer retail have separate rules, which are unlikely to change.

Sitharaman’s proposal in the Budget, however, hints that the incumbent government may be open to changes.

Interestingly, BJP’s manifesto for the general elections 2019 has no mention of its viewpoint or agenda regarding FDI in multi-brand retail, unlike the 2014 manifesto, which clearly mentioned that the BJP will not support FDI in multi-brand retail. But the manifesto did say the BJP would bring in a National Policy for Retail Trade to the protect interests of local traders. That could be interpreted to mean that protecting local traders implies the policy on foreign multi-brand retail will remain. The unexpected thaw in the norms for single-brand retail, however, leaves the question of whether multi-brand retail may get some relaxations up in the air.

 

 

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