The Union Cabinet on Wednesday relaxed the rules for single-brand retail, more than seven years after the foreign investment cap was removed for the segment to attract marquee foreign brands such as Gucci, Louis Vuitton, Ikea and others into the country. The latest government move is in line with the recent Budget announcements on FDI changes.
While 30 per cent local sourcing remains a mandatory condition for single-brand retail, the government has now agreed to a long-standing industry demand to make things easier for foreign retailers. With the change, foreign retailers’ India buy for exports will be factored in to meet the 30 per cent domestic sourcing norm. Companies in the single-brand space can also start online retailing without opening brick-and-mortar stores first, something that was not allowed earlier. While 100 per cent FDI is allowed in single-brand retail, whenever the foreign investment exceeds 51 per cent, the mandatory local sourcing norm kicks in.
It was not immediately clear whether the new rules would enable Apple to open fully-owned stores in India or not. Most analysts were optimistic about the Tim Cook-led American major making an entry after the latest rule change. But, others such as Arvind Singhal, chairman of Technopak Advisors, argued manufacturers like Foxconn, which make products for Apple, may not be able to comply with the sourcing norms even after the relaxation. Foxconn’s sourcing from India is believed to be marginal for the export market unlike in the case of chains like Ikea and H&M.
Foreign companies including Ikea, which brought the first big piece of FDI in single-brand retail, see the latest Cabinet decision as a positive. Welcoming the move, Swedish furniture major Ikea, which had committed Euro 1.5 billion investment in the country in 2012, said in a statement that the company was committed to increase local sourcing from India.
Besides single-brand retail, the Cabinet allowed 100 per cent FDI under automatic route in contract manufacturing and commercial coal mining and related processing infrastructure. Sourcing for contract manufacturing will also be counted towards total sourcing commitments.
Also, for the first time, the government has set an FDI cap at 26 per cent for digital news media, which till now was not covered under any foreign investment rules. Digital media companies with more than 26 per cent FDI will now be required to bring down their foreign equity level.
Officials said they would start a case by case assessment of organisations that have already hit the cap.
“There’s a slowdown in the FDI situation worldwide. Even in this situation, we hope India maintains its pre-eminent position after these announcements,” Commerce and Industry Minister Piyush Goyal said while briefing the media in New Delhi after the Cabinet meeting.
Investors now want to open manufacturing centers globally, Goyal said. ‘’They are looking at India to make products for the Indian markets as well as for exports. We have till now focused on those that retail in India, but the country gets a double advantage when investors export from India.’’
As for the single-brand decision, the Department for Promotion of Industry and Internal Trade (DPIIT), the nodal body for investment-related policy, will now also count local sourcing in phases. It will be counted as an average of the total value of the goods purchased by a retailer in the first five years in a single block. After that, the sourcing norms will kick in annually.
“Single brand reforms will have a long-lasting impact in boosting market hygiene, enhancing customer satisfaction and most importantly raising mobile handset retail to international standards. Iconic stores of global standards have a symbolic value for the nation too”, said Pankaj Mohindroo, of India Cellular And Electronic Association.
For coal mining, so far 100 per cent FDI under automatic route was only allowed for captive coal production. It has now been decided to permit 100 per cent FDI for not just commercial coal mining but for associated processing infrastructure as well, including coal washery, crushing, coal handling, and separation.
“Given climate change related challenges, consumption of coal is in decline in OECD countries and even in China. Fresh investment in coal sector from global mining majors, is quite challenging going forward,” said Debashis Mishra, leader, energy, resources and industrials, Deloitte India.
“Sub-scale size of mines, challenges relating to land acquisition and getting statutory clearances, law and order challenges in coal belt will also be factors considered by large foreign players before deciding to invest in Indian coal sector,” Mishra said.
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