FDI In Retail To Get A Boost As Govt Mulls Scrapping Domestic Sourcing Clause

Recently, there seems to be a new wave of hope for a kick in the foreign direct investment (FDI) in single-brand retail space, with the government considering the scrapping of compulsory 30% domestic sourcing clause. The Department of Industrial Policy and Promotion (DIPP), under the Commerce Ministry, is reviewing this restrictive clause, which is a major bottleneck. If implemented, the move promises to open up a plethora of opportunities for global players to boost expansions in areas such as clothing, electronics and luxury goods.

Sourcing clause takes away the authenticity of the brand
Till now, this clause has played deterrent to the interests of foreign brands as it makes it imperative for the single-brand retailers to compulsorily source at least 30% of the value of the goods sold in India from Indian small scale manufacturers (SMEs) and/or village and cottage industries, artisans and craftsmen. However, these businesses have created a unique brand promise and imagery based on the quality of their products, and often, they are not able to meet the same quality standards with local sourcing.

In addition, these players comply with strong process orientation and follow uniform business strategies along with having global supply chain. Hence, it becomes difficult to source local vendors, as that means losing out on the authenticity of the brand. Thus, if the government scraps the sourcing clause completely, it can really make it a lot easier for these foreign brands to ensure their quality as well as credibility.

Smoother implementation
Moreover, this 30% sourcing clause also creates implementation hurdles for foreign brands. At the moment, there is no strict supervision over product and inventory with local manufacturers and vendors on whether this norm is actually complied by companies or not. This poses a bigger threat for these companies as, if after five years, the government wants to verify the compliance, there may not be enough evidence to prove anything and that could lead to a risk of them facing a non-compliance situation, which may or may not be true. With this ceiling of 30% local sourcing gone, it will mean smoother implementation and function for the single-retail companies, which in turn, will encourage them to expand and grow faster in the country.

More beneficial for luxury brands
The changing consumer demographics and exposure to international brands have attracted the interest of premium and luxury players to open stores in India. For instance, luxury group Richemont, whose stable of brands includes Cartier, Van Cleef and Arpels, is willing to enter the single-brand retail space. If the clause is done away with, it will be a favourable move for such brands as SME sourcing for high end labels will remain a challenge.

Moreover, as these brands make only a few thousands of pieces and also change product lines quite often, it is a herculean task to comply with the local sourcing prerequisite with such small amounts of product. Scrapping this rule will mean easier operation for luxury and premium brands like Gucci, LMVH, Cartier, etc and thus, make them more inclined to expand and invest in the country’s retail space.

Encourage the shy companies
Due to this local sourcing ceiling, the single-brand retail model becomes too complex, causing many companies like Apple and H&M to shy off from investing in the country. If this hurdle is removed, these and many more companies will be inclined to invest more, which means increased FDI inflow for the retail space.

The sourcing condition was also being seen as impacting investments by technology companies as any overseas company looking to own more than 51% of a single-brand retailing venture would have to comply with the norm. The move will also allow companies such as Apple to open stores.

Analysts believe that a more favourable environment for high-end labels will see a tremendous spurt in the economy. Over Rs 300 crore has been invested in the retail space from foreign investment over the last two year period. This has resulted in more jobs which is a key growth driver, especially in a slowing economy.

Clearly, scrapping this 30% sourcing rule will mean a lot for the Indian retail space and also the overall economy in general. Thus, from pure industry viewpoint, this might prove to be a complete game changer for the Indian retail industry.

The previous government allowed 100% FDI in single-brand retail in 2011 with mandatory 30% sourcing from small and medium enterprises.