A test case in retail FDI
Swedish home-furniture giant IKEA’s decision to invest about 1.5 billion euros (Rs 10,500 crore) in India through 25 stores, comes with a set of conditions. HT takes a look.india Updated: Jul 10, 2012 22:43 IST
What has IKEA told the government?
The iconic home accessories company wants India to tweak a clause that will require it to source 30% of the value of goods sold in India from domestic small industries whose investment do not exceed Rs 5.5 crore. IKEA wants that local firms, which will supply its inventory, should continue to qualify as small industries even if their investments exceed Rs 5.5 crore after their association with the Swedish giant.
What’s the logic for this argument?
Such firms will very soon outgrow the stipulated valuation and become competitive medium to large set-ups, IKEA said in its application to the government seeking approval to set up stores in India.What are the other major changes that IKEA wants in the government’s policy?
IKEA also wants the compliance of the mandatory 30% sourcing condition to be calculated over a cumulative period of 10 years and not annually. The government has originally notified that an audit of these sourcing agreements will be carried out by a statutory authority. IKEA, however, has told the government this should be done through a process of self-certification and subsequently by chartered accountants as opposed to a statutory audit.
What has been the government’s response to these?
The government, it is learnt, is readying plans to ease foreign direct investment (FDI) norms for single brand retail including the condition that global firms will have to source 30% of their merchandise requirements from local small firms and artisans. Retail giants have been reluctant to set up shop in India citing restrictive conditions including the 30% mandatory sourcing clause from small companies.
What’s fuss about FDI in multi-brand retail?
In November last year, the government had decided to open up the retail sector to foreign investors through FDI. The Union Cabinet had decided to allow FDI in multi-brand retail with a ceiling of 51% and 100% FDI in single brand retail. The decision on FDI in multi-brand retail, however, was suspended following a strong political opposition.What does it mean?
It means that global retailers such as Walmart, Carrefour, Tesco and others can’t set up mega deep-discount stores in India through joint ventures with Indian firms where the foreign partner can hold up to 51% equity.
Why is there so much of opposition about FDI in multi-brand retail?
Opposition parties and small traders are worried that large deep-discount stores of multinational corporations will drive street vendors and neighbourhood ‘mom-and-pop’ grocery stores out of business endangering their livelihood.
How will the farmers’ benefit from the organised retail?
In the present dispensation, there is a complex chain of procurement involving several middlemen. FDI in retail will create the enabling environment for procurement, at least of fruits and vegetables directly from farmers offering them higher income. At present, the price that a farmer gets for a kilo of onions is about half of what it is sold to final consumers.
What about small and medium enterprises?
The government has made it clear that foreign retailers will have to source 30% of their manufactured items from Indian small and medium retailers. By engaging local producers, organised retail provides them with an access to a much broader consumer set. For instance, a leading retailer operating in India has engaged a local pickle manufacturer in Amritsar and invested to upgrade its equipment. As a result, this manufacturer is now present across markets that were traditionally beyond his reach.
What about consumers?
The choice basket for Indian consumers will only get better, bigger, wider and cheaper. Organised retail provides higher quality of goods on account of the pre–defined and stringent standards adopted by the retailers. And of course, the price will be cheaper. Studies have shown that consumers, on an average, will save at least 10% on daily use goods.