Draft cabinet note on sourcing norm for FDI in retail soon

Last Updated: Thursday, July 5, 2012 - 17:52

New Delhi: The commerce and industry ministry will soon circulate a draft cabinet note to bring out further clarifications on the mandatory 30 percent sourcing from small industries in the wake of IKEA seeking further relaxation of the norms.

The ministry, however, is unlikely to give away too much to the Swedish furniture and home furnishing retail giant, as according to sources, it is tough to accommodate all the demands that IKEA has made.

"The DIPP will soon circulate a draft cabinet note to about 20 different departments for further clarification on mandatory sourcing norm," a source said.

According to the source "the draft note is aimed to get more clarity on these issues".

As per the present single brand FDI policy, global retailers would have to source 30 percent of their requirement from Indian small industries which have a total investment in plant and machinery not exceeding USD 1 million

Swedish furniture major IKEA, which has proposed to invest Rs 10,500 crore to set up single brand retail stores in India, had asked the government that it must be allowed to continue sourcing from small units even after the vendors have crossed the mandatory USD one million investment limit.

On the possibility meeting all the demands made by IKEA, the source said "the firm has asked for too many relaxations and it is tough to accommodate all the demands".

However there were certain genuine clarifications which IKEA has raised and the ministry was trying to get a clarity on it, a source added.

A DIPP official said that there is a need for further clarification on "issues like what is the period over which the retailers would calculate 30 percent sourcing, from which date you calculate USD 1 million investment (need to be clarified)?".

In its application, IKEA had stated that if the group were to comply with this norm, such units would very soon outgrow the stipulated valuation (of USD 1 million) and become large set-ups.

Owing to the restriction contained in the FDI policy, such small industries may lose out on vast volumes of business from the group, the company had said.

Moreover, it said that if the company would keep on changing its vendors, such abrupt change would also disrupt the quality of the products that would be released in the market and also the supply chain operations of IKEA group.

Industry experts said the absence of a clarification on the matter is also leading to negligible inflow of FDI in the single-brand retail despite the government has increased the FDI cap to 100 percent in the sector.

In January, the government notified its decision of allowing 100 percent FDI in single-brand retail, paving way for global chains like Ikea, Adidas, Louis Vuitton and Gucci, to name a few, to have full ownership of their India operations.

Though 51 percent FDI in single brand was allowed in February 2006, not much investment has come in the sector. During last three and half years, FDI worth only USD 45 million was received in the sector.


First Published: Thursday, July 5, 2012 - 17:52

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