NEW DELHI — Seven years after 100 percent foreign direct investment in single-brand retail was allowed in India, the country’s government has finally relented to make it easier for global brands.
In September 2012, India opened its doors to global brands with what many found was a dismaying clause — the retailer had to source 30 percent of the goods sold in the stores from India, and e-commerce was not allowed unless the retailer had a brick-and-mortar presence. With high real estate rentals, and malls just beginning to grow throughout the country, it was a challenging situation for retailers, which were eager to expand into one of the fastest growing markets in the world.
On Wednesday, the Indian government unveiled a relaxation of those rules, bringing down the 30 percent sourcing requirement to 10 percent, provided the firms export 20 percent of their products to other countries.
“The changes in the foreign direct investment (FDI) policy will result in making India a more attractive FDI destination, leading to benefits of increased investments, employment and growth,” Piyush Goyal, the commerce minister, told a media briefing. “Online sales will lead to the creation of jobs in logistics, digital payments, customer care, training and product skilling.”
The changes drew a positive reaction.
“This is a brilliant policy tweak and will not only encourage more brands to come to India but will also lead to more exports out of India by these brands as their local sales grow,” said Harminder Sahni, founder and managing director of consulting firm Wazir Advisors. “I believe this is a major and positive change. Allowing all local sourcing from India whether for exports or for domestic sales will be counted against the 30 percent local sourcing requirement. It means retailers like Ikea, H&M, etc., need not worry about local sourcing norm at all as their current sourcing for exports is far greater than the 30 percent of local sales.”
Arguments about the sourcing requirements have been particularly intense as Swedish brand Ikea entered India in 2014, with a plan to invest $1.5 billion to open 25 stores over a 10-year period, and Swedish retailer H&M entered India in 2015. Inditex-owned Zara opened in India in 2010, in partnership with the Tata group.
“Not every international brand (and especially in the fashion segment) prefers to manage its India operations on its own. India has always permitted brands to operate through Indian franchisees (or joint venture partners) and many do so that include The Gap, Tommy Hilfiger, and Levi’s,” said Arvind Singhal, chairman and managing director of consulting firm Technopak, while pointing out that the rule change would not necessarily help luxury brands.
“Luxury brands hardly source much from India and hence it will be difficult for them to meet the local sourcing norms even if it includes sourcing for their global operations,” he observed.
In general, he is upbeat about what this means for the retail market.
“In my view, relaxation in domestic sourcing norms for single-brand retailers is certainly a positive step and will help relatively large retailers, brands such as Ikea, H&M, Inditex — Zara, and Uniqlo to set up or expand their retail presence in India through their own retail stores,” Singhal said.
No changes were announced for multibrand retail, for which 51 percent FDI retail was announced in December 2012. With much of the $750 billion retail market in India still in the unorganized sector — less than 10 percent is organized — the lobby of mom-and-pop stores which constitute a large segment of the vote bank continue to oppose the entry into India of large retailers like Walmart, which has 26 stores in India in the wholesale cash-and-carry format.