201908.30
13

Foreign Direct Investment (FDI) norms eased to attract Brands

The Indian economy has been witnessing a slow down since beginning of 2019. A mixture of international events and domestic fiscal tightening has lead to slowdown in India that not so long ago regularly featured among the world’s fastest growing economy. The government has taken note of this slowdown and made some bold announcements to ease the pressure. This post discusses the changes in the foreign direct investment (FDI) relating to single brand retail trade (SBRT) announced by the government. The objective of new policy change obviously being to attract investment into India from multi-national brand owners. Further to make India business friendly for brands to access the Indian consumer market comprising the upper and middle class populace.

The new set of norms for SBRT inter alia include provisions allowing foreign companies to first set up their own online businesses in India and later follow it with the setting up of physical stores. Foreign retailers can now start online retail two years prior to setting up a physical store. However, there is a condition attached to the opening of online business for single brand retail which requires them to comply with local sourcing norm. Single-brand retailers with over 51% holding will have to locally source 30% of the value of goods sold. This sourcing is primarily linked with the sector in which the brand would operate. The government notification says that “With a view to provide greater flexibility and ease of operations to SBRT entities, it has been decided that all procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported”. Earlier these provisions were meant to take into account only the Indian domestic sales which has now been widened to include exported goods as well. Further, the local sourcing of procurement will not be assessed on year-on-year, but instead considered as five-year blocks – which is expected to provide greater flexibility and ease of operations for the firms.

Impact on brands

Brands such as IKEA, Apple etc., have welcomed these relaxation in norms as this would enable them to set up their online business without any restrictions. Further, it will enable such Companies to have a better connect with their customers.  Earlier, Apple, instead of setting up its own online retails business in India, was constrained to sell its products through online third party vendors such as Flipkart, Amazon, Snapdeal etc.

Also, in the case of IKEA, Swedish furniture retailer, which has invested large sums of money in India and is in the process of expanding its operations, the local sourcing norms has been a bone of contention as goods sourced for exports by IKEA were not included in the 30% local sourcing requirement.  With the definition of local sourcing having been widened to include goods procured for export as well, this will encourage brands to source more products from India and take the benefit for expanding their operations in India.

Conclusion

It is this pragmatic thinking by the government to bring about changes in FDI policy that would not only present India’s investor friendly image but also attract much needed foreign investment. With rising unemployment and slow down in manufacturing activity, it is expected that the new sourcing norms will also encourage stake holders to source their global procurement requirement/s from India – thus giving boost to any manufacturing activity within India.