India’s proposal to ease local sourcing norms for foreign companies that sell only under their own brand is set to boost investment in the country, experts said.
The government on Wednesday eased local sourcing norms for single-brand retail, providing relief to foreign brands.
Apple Inc.—which has lobbied for easing of norms for nearly four years—will be the first one to begin selling its products in the coming months, a person privy to the company’s plan told BloombergQuint requesting anonymity.
Under the new norms, local sourcing for export of goods from a foreign manufacturer in the country will now be part of the mandatory 30 percent local sourcing requirement.
Expanding the ambit of local sourcing is expected to bring in more investment since single-brand retailers can now serve both domestic and international markets, Atul Pandey, partner at Khaitan & Co., said.
Agreed Lalit Agarwal, chairman and managing director of V-Mart Retail. “It brings a great environment for foreign investors to invest in India and gives a lot of confidence as retailers to us that the market is moving up,” he told BloombergQuint. Agarwal expects more investments in apparel manufacturing.
IKEA said it is committed to increase local sourcing from India. “Government of India’s efforts to enhance ease of doing business for single-brand retailers is encouraging,” the Swedish furniture maker said. “We have ambitious and optimistic plans to work with affordability and offer everyday low prices for the many people in India.”
Under the new rules, brands applying for foreign direct investment in single-brand retail will also be allowed to commence e-commerce operations before they set up a physical store. This, however, will be allowed on the condition that a physical store will be opened in the next two years.
“Allowing single-brand retailers to start online stores, while meeting local sourcing norms, aligns well with the ‘Digital India’ initiative, giving them time to build their brick-and-mortar presence in parallel,” Harsha Razdan, partner (consumer markets, life sciences and internet business) at KPMG, said.
The move, according to Faisal Kawoosa, founder of techARC, will allow brands to look for smaller investments through digital rather than going for large volumes for physical setup.
Contract Manufacturing To Aid
The government has also provided 100 percent FDI via automatic route in contract manufacturing. Earlier, there was no clarity on the FDI limit for contract manufacturing.
“India is now certainly well-positioned to take advantage of the U.S.-China trade tensions and become the next manufacturing hub,” Ankur Pahwa, partner and national leader for E-Commerce and Consumer Internet at EY India, said. This will boost employment and support the growth of ancillary manufacturing units and will position India well for being part of the global value chain, he said.
Atul B Lall, managing director of Dixon Technologies Ltd., said the company is already seeing rising interest from China and far east. “I can see some inflow of investments have already started.”
Besides, the new rules also provides for single-brand retailers to do sourcing through an unrelated third party under a legally-tenable agreement. “It may practically permit most global retailers to do business in India if they are open to get their products to be retailed ‘contract manufactured’ in India,” Paresh Parekh, national leader for Tax (retail and consumer sector) at EY, said, adding FDI in contract manufacturing is the “actual game changer”.
Lall, however, said this will lead to competition in the industry. “The smaller companies in India with a lack of resources — finance and technology — are going to find it difficult to sustain,” he said. “You need certain skills or technology base to grow now because things are opening up. So, there will be a significant change in the industry.”
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