India Mulls Scrapping 30 Percent Domestic Sourcing Requirement

July 24, 2014 Posted by India Briefing Reading Time: 4 minutes

DELHI – India’s Department of Industrial Policy and Promotion (DIPP) is reportedly considering scrapping the 30 percent domestic sourcing requirement in single-brand retail.

According to India’s Ministry of External Affairs, the move could yield higher foreign investment (FDI) inflows by allowing high-end and high-tech brands to enter the Indian market without being required to source goods locally.

For technology and luxury brands in particular, yearly or monthly changes in style on a limited number of products make it all but impossible to comply with strict domestic sourcing requirements. This issue is compounded by issues surrounding the counterfeiting of luxury goods produced in developing rather than Western markets.

“How can luxury brands source 30 percent from India? It is simply not possible,” a DIPP official commented, “Single-brand retail policy needs to be eased to allow foreign brands to invest in the country. We are working on that right now.”

After permitting 100 percent FDI in single-brand retail with a mandatory 30 percent SME domestic sourcing requirement, the Indian government later relaxed the requirement slightly when granting single-brand Swedish furniture retailer Ikea permission to operate in the country.

In the absence of policy clarity since Ikea’s approval, however, several foreign companies have seen their single-brand retail applications with the DIPP stall for months on end.

In addition to clarifying or eliminating the 30 percent SME souring requirement, the DIPP is also reportedly considering a plan to allow single-brand retailers to sell sub-brands in India under different trademarks. This would theoretically provide companies with the flexibility to sell multiple sub-brands without violating India’s strict 51 percent FDI cap on multi-brand retail.

E-Commerce Changes in the Works

Earlier this month, the DIPP also claimed to be considering liberalizing foreign investment restrictions in the country’s US$13 billion e-commerce sector – something that would potentially trigger a substantial influx in FDI if coupled with the scrapping of the 30 percent sourcing requirement.

In his 2015 budget speech, Finance Minister Arun Jaitley said manufacturing units may soon be permitted to sell products through retail channels, including e-commerce platforms, without additional government approval. Because 100 percent FDI is currently permitted in manufacturing (with the exception of a few areas such as defense), this could be the back door to participation in e-commerce and e-retail operations for foreign firms.

Since elections, the DIPP has been pushing for a higher FDI cap in e-commerce as part of the department’s strategy to stimulate foreign investment.

While India permits 100 percent foreign direct investment (FDI) in business-to-business (B2B) e-commerce, FDI in business-to-consumer (B2C) e-commerce remains strictly prohibited and bound by FDI restrictions on the retail sector more generally. Because of this, many foreign e-retailers such as Amazon and eBay have established a “marketplace model,” whereby local independent merchants sell goods directly to consumers, and the platform earns commission from those merchants.

Although the incoming BJP explicitly expressed opposition to liberalizing FDI caps in India’s retail sector, most analysts view retail FDI caps as more of a “wait-and-see” issue. Lobbying efforts in recent months by retail heavyweights Amazon.com and Walmart highlight the belief by many foreign companies that the BJP’s policy towards liberalizing FDI caps in e-retail will ultimately be flexible.

In January, the DIPP floated a discussion paper on FDI in e-commerce to solicit comments from policymakers and industry leaders on the various advantages and disadvantages of permitting 100 percent FDI in B2C e-commerce.

Key disadvantages noted by the discussion paper include global players having an “adverse impact” on India’s domestic e-commerce industry, the inability for ‘brick and mortar’ shopkeepers to compete with e-retail and the possibility that e-commerce would hinder the development of Indian-owned and led B2C e-retailers.

It also suggests, however, that permitting FDI in e-commerce could contribute as much as 4 percent GDP to India’s economy by 2020.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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