Do The FDI Rules Open A New Route Into India For Global Retailers?
Many global retailers, might be open to having their products ‘retailed or sold’ by getting ‘contract manufactured’ in India.
The Finance Minister, in the first budget of the new NDA government had put forth a proposal to relax the local sourcing norms for foreign direct investment in single-brand retail trade.
Taking steps in this measure, the Union Cabinet, chaired by Prime Minister Narendra Modi on Aug. 28, 2019, has approved the proposal for review of foreign direct investment on various sectors including single-brand retail trade.
Currently, the FDI policy for single-brand retail trade provides for 30 percent local sourcing where the FDI exceeds 51 percent. There was a lot of reluctance not only by the existing foreign players in the sector to increase FDI beyond 51 percent, but also by new foreign brands to enter the sector owing to such sourcing norms.
While the 30 percent local sourcing remains a mandatory condition for single-brand retail trade, the government has now decided that the current cap of considering exports for sourcing condition satisfaction purposes ‘for 5 years only’ has been removed. Further, single-brand retailers will be allowed to adjust their ‘entire’ procurement of goods from India (earlier it was on an incremental basis) for their global operations for meeting the local sourcing norms.
Further, the government has decided that going forward, sourcing of goods for single-brand retail trade from India for global operations can be done even indirectly ‘through a third party’ under a legally tenable agreement.
One of the other welcome changes is the government’s decision to permit sale of products through online trade before setting up of brick and mortar stores, subject to the condition that the entity opens the brick and mortar store(s) within 2 years from date of start of online trade.
This goes a long way in demonstrating the acknowledgment of the government towards changing the consumer’s buying behaviour in India.
Lastly, and most importantly, allowance of 100 percent FDI in contract manufacturing under automatic route seems to be a game changer. It is no doubt an important move to promote the Make in India initiative and give an impetus to manufacturing exports. But it may also turn out to be a boon for many global retailers who are not themselves manufacturers but typically follow a model of procuring through contract manufacturers for private labels for their brands, which enables them to control the quality and supply and protect IP of the brand as well.
Such a model may not be uncommon for mobile brands/electronics/apparels etc. Going forward, such retailers instead of coming through FDI in single-brand retail trade or multi-brand retail trade regulations, may explore investing in India through FDI in the contract manufacturing route.
A number of global retailers, might be open to having their products ‘retailed or sold’ by getting ‘contract manufactured’ in India, and may look at doing business in India.
This could possibly attract global retailers to set up shop in India under the FDI in contract manufacturing route, thereby proving to be a win-win for both Indian manufacturers and such retailers.
It would be interesting to see any other conditions or requirements which may form part of the Press Note which is expected to be released by the government to incorporate the aforesaid amendments to the extant FDI policy.
All in all, days after announcing a number of measures and the stimulus package by the Finance Minister, these rationalisation measures of the government should help in further liberalisation of the FDI policy and increase FDI flows in India.
This move is also expected to attract a number of players who have been eyeing India for business for quite some time. This should notch up India’s position in terms of ease of doing business.
Paresh Parekh, is National Leader for Tax & Regulatory (Consumer Products and Retail Sector), and Ankush Mehta is Director, at EY India. Nitesh Malpani, Manager, EY India also contributed to this article.
The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.