Until now, foreign companies were mandated to source 30% of raw materials locally, making it difficult for many like Apple to set up a direct presence in India.

Government eases FDI in single brand retail What this means for the Indian market
Money FDI Thursday, August 29, 2019 - 16:56

In a major boost for companies such as Apple, IKEA, and other foreign companies, the cabinet eased Foreign Direct Investment (FDI) norms in single brand retail. Until now, while 100% FDI was allowed in single brand retail, there were several riders that came with it, including mandatory 30% local sourcing of raw materials. This made it difficult for several foreign brands, especially Apple, to set up a direct retail presence in India.

Several overseas retail brands such as Zara, Marks & Spencer’s, Forever 21 operated in India through licensing agreements with companies such as the Tata Group, Future Group, Reliance Retail, etc. However, with the new norms, these companies will now be able to sell to customers directly in India.

Single brand retail refers to a store that sells products of a single brand only. For example, a Nike, Samsung, Raymond store which only sells products of that brand would be a single brand retailer. Stores such as a Croma, Lifestyle, Westside, which sell products of various brands constitute multi-brand retail.

What are the new norms?

The government has allowed single brand retailers to sell online before opening physical stores, subject to the condition that brick-and-mortar stores come up within two years from the date it starts online operations.

Earlier, they weren’t allowed to have online stores unless they had a physical presence.

And for brands to have a physical presence, it was mandated that they locally source 30% of the value of goods that will be sold in India. This could be met as an average during the first 5 years, and then annually towards its India operations.

The government has now said that all procurements made from India by a brand will be counted as local sourcing, irrespective of whether the goods procured are sold in India or exported.

What this means is that, while companies such as IKEA were sourcing from India for global markets even before they set up an India store, that did not count as local sourcing. Only what they sourced locally to sell in their Indian stores was counted. But now, everything they source locally, whether it being sold here or globally, will be counted as fulfilling the local sourcing norms.

The new norms also allow a company to source goods from India for global operations through a third party. Earlier, companies were allowed to source goods locally only directly by the brand or its group companies.

How does this benefit the Indian market?

Apple had been urging the government for many years to ease the local sourcing norms so it could not only set up direct physical stores here, but also increase local manufacturing of its devices in the country.

The new norms could be especially beneficial to the country at a time when the US-China trade dispute is heating up. Companies such as Apple can now look at having a larger presence in India. This could also bring companies such as Tesla to India, which have stayed away due to tough government regulations and high import duties.

Being one of the largest technology companies in the world, Apple is set to be one of the biggest beneficiaries of the new FDI norms. Post the announcement, appreciating the government’s support, Apple said it looks forward to welcoming customers at its first branded retail store in India soon.

"We love our customers in India and we're eager to serve them online and in-store with the same experience and care that Apple customers around the world enjoy… it will take us some time to get our plans underway and we'll have more to announce at a future date,” Apple said in a statement.

Being able to set up online stores too, will give several foreign brands a chance to first understand the Indian market through the e-commerce route before setting up physical stores.

“This will help new entrants in particular to initiate their business through the online channel especially since the infrastructure to support online retail is quite well developed now," Pinakiranjan Mishra, Partner and Leader, Consumer Products and Retail, EY India, said.

With exports also being counted as local sourcing, brands will be attracted to the Indian market, thus bringing in more investments.

Welcoming the move, Janne Einola, Country Manager, H&M India, said that while H&M has been sourcing from India since the last 30 years for its international markets, it’s great to see global sourcing is now part of the 30% local sourcing norms. “We see this supporting the ease of doing business in India and driving in larger investments from global companies.”

Abhishek Ganguly, managing director of Puma India, said that the new norms will make it easier to meet the 30% minimum local sourcing criteria for global brands wanting to run single brand retail, if they are also sourcing from India for other markets. “I see this as a big opportunity for apparel companies, where Indian factories have strong capabilities. This decision not only improves ease of doing business, but also promotes the Make in India initiative by incentivising global sourcing from India,” he added.

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