The government on Thursday relaxed investment rules in multi-brand retail, significantly easing the condition that global giants will have to procure about a third of the goods that they sell in India from local small firms and artisans, a condition that the industry had argued as restrictive.
It also allowed global chains to open stores in smaller cities by removing the restriction that only the 53 urban centres with a minimum population of one million can house such supermarkets.
The decisions were taken at a union cabinet’s meeting headed by the Prime Minister Manmohan Singh as the government announced an ambitious fight back to revive the economy hit by a sharply sliding rupee, uncertain external conditions and crippling industrial slowdown.
The cabinet also formally rubber-stamped an earlier decision to lift investment caps for foreign investors in a range of sectors including telecom, high-tech defence production and insurance.
Analysts see the measures as a sign of the government heeding criticism that restrictive policy environment was hurting India’s image as global investment hotspot.
“Good to see the govt moving with resolve. Now all we should say is Bhaag Milkha Bhaag,” Anand Manidra, chairman of Mahindra and Mahindra, tweeted.
In a politically sensitive decision last September, India allowed upto 51% FDI in multi-brand retail but not a single superstore has set shop in India with giants including Walmart, Carrefour and Tesco seeking clarification on a host of details, which the cabinet on Thursday has sought to have addressed.
Goods bought from companies that have invested at least $ 2 million (about Rs. 12 crore) in plant and machinery will now qualify for being counted for the “mandatory 30%-sourcing requirement” to big retailers, the cabinet has decided.
This is double the earlier investment threshold of $1 million (about Rs. 6 crore) and will make larger firms eligible to supply merchandise to large foreign retailers. Besides, such firms will continue to make the grade as small enterprises even if their investments exceed $ 2 million after their association with retail giants.
In addition, farmers’ and agriculture cooperatives will be eligible for being counted as small firms for meeting mandatory-sourcing condition, implying that the processed fruits and vegetables procured from Indian farmers will qualify for meeting this condition, commerce and industry minister Anand Sharma told reporters after the cabinet meeting.
The compliance of the mandatory-30%-sourcing norm from Indian small firms will be audited as an average of five years in the first instance. This will allow retailers to use the first couple of years to import merchandise and then gradually increase the sourcing from local companies.
Earlier retailers were asked to invest half of their at least $100 million ( about Rs. 600 crore) in back-end infrastructure. Under eased rules, retailers will meet this condition within three years only in their first tranche of investment, allowing them the freedom to deploy capital subsequently according to “need-based” necessity.
“We are studying the Government’s recent revisions to the FDI policy and remain optimistic about the opportunity in front of us,” said a Walmart India spokesperson.
The cabinet also approved a comprehensive definition of term "control" for corporate deals involving foreign companies. There have been uncertainties about the exact definition of 'control' in recent transactions including the proposed Rs. 2,058 crore Jet-Etihad transaction, which was cleared by the Foreign Investment Promotion Board (FIPB) recently.
The government expects the measures to lure precious dollars.
“We are expecting FDI flows will increase and the foreign investors will have much greater confidence in the Indian foreign investment policy,” economic affairs secretary Arvind Mayaram, whose recommendations for raising FDI in several sectors were by-and-large accepted, said.