NOTE on FDI
Commercial compulsions, not government diktat, are the best way to enforce
local sourcing by foreign retailers.
Having messed up badly in foreign
direct investment (FDI) in multi-brand retail, the Government appears to be
doing an encore in single-brand retail as well. While the former has run into
political obstacles, even the permission given for 100 per cent FDI in
single-brand retail, as against the existing limit of 51 per cent, is stuck due
to question marks over local sourcing norms imposed by the Government. These
mandate foreign retailers like IKEA and United Colors of Benetton — who hawk
single product categories such as furniture or clothing under their own brands —
to source at least 30 per cent of the value of products they sell from small
manufacturers within India. This precondition can possibly be implemented in
multi-brand retail, which involves selling everything from fruits and vegetables
to dry groceries, home furnishings and electronics under the same chain of
stores. A Walmart or Tesco, provided they are allowed to set up shop in the
first place, may procure potatoes, basmati rice or apparel domestically even
without being asked. But how can one expect the makers of Omega watches,
Swarovski crystals or Gucci leather goods to do the same — buying from artisans,
craftsmen and small industries whose investments in plant and machinery cannot
technically exceed $1 million?
Whether it is in single or
multi-brand retail, such requirements are quite unnecessary, leave alone the
operational challenges of their implementation. Ultimately, even an IKEA may not
be averse to procuring curtains and lamp shades from suppliers in Panipat or
Moradabad: The problem is in making them mandatory, which means having to
maintain separate accounts and appointing statutory auditors just for this
purpose. All these only add to transaction costs, leading the retailers to
choose softer options such as franchise arrangements and brand licensing, as
opposed to making large direct investments with real potential for creating
jobs. These jobs would be not just at the point of sourcing — which seems to be
the Government’s sole focus — but all along the chain extending from
warehousing, transport and distribution to the final retail end.
The Government should drop this
insistence on local sourcing for allowing 100 per cent FDI, at least in
single-brand retail. If foreign retailers are serious about India – IKEA
committing to invest €1.5 billion would suggest so – they cannot afford to
simply stock their stores with imported products in a scenario of a weakening
rupee. How much to import and from which domestic manufacturer to source, are
decisions best left to the commercial judgment of the retailers themselves. By
creating artificial distinctions between not just single-brand and multi-brand
retailers, but also between 51 per cent and 100 per cent in the case of the
former, the Government is sending out wrong signals to foreign investors. And
this is quite avoidable today, when the country needs both foreign exchange and
investments.
-Umesh Shanmugam
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