The government's intention to allow 100% foreign direct investment (FDI) in single-brand retail may not have the desired effect on the economy, if one goes by the conditions on sourcing that it reportedly intends to impose. A draft note circulated earlier this month, officials say, imposes a mandatory 30% sourcing from small and medium enterprises (SME) and village and cottage industries, including artisans and craftsman. This means that if companies like Samsung, Audi, BMW, LV, Gucci etc want to open stores in India, they will have to source products from artisans.
Such mandatory sourcing may seem to be a great idea to expand the base of beneficiaries of the government's reforms agenda but it is far removed from the reality of how products are made and sold by companies that run their retail outlets. If one were to go by these norms, it would leave many companies uninterested. Would then opening up the sector make any significant impact on India's retail market? I don't think so.
The note on FDI in retail is strewn with contradictions. It says that the current restrictive foreign equity cap has led to poor — if not negligible — flow of FDI in this sector (just 0.03% of total flow, amounting to $44.45 million). It further observes that 100% ownership would bring benefits such as global best practices in quality, designing, packaging and production.
Government officials claim that one of the key beneficiaries of the policy of sourcing would be the handicrafts sector. The reference here is to sectors such as textiles, gems and jewellery, leather, jute etc. The note says that there is a critical need to integrate the producers with the domestic and global markets and this would sustain the existing base of artisans and craftsmen.
That the note continues to be misplaced and mixed up in thought and vision is evident when it defines SMEs as outfits that have an investment in plant and machinery of $0.25 million or less. If the investment were to grow beyond that, as part of scaling up and upgradation, then it would not qualify as a small industry. That means if a foreign brand sources from these units, it would have to find another SME to start all over again once the old SME crosses that investment threshold. In effect, if SMEs have to benefit from foreign companies, they must limit their aspirations to $0.25 million.
This confusion shows that the government has not done sufficient homework on brands, production of a variety of goods other than arts and crafts, and whether sourcing from the SME sector can work for technology-run companies or even cosmetic brands.
It appears that the government has specific segments in mind while putting this note together — largely garment and handicrafts stores such as Fabindia (which has been referred to in the Cabinet note), home furnishing and multi-brand large scale departmental stores that make their outlets competitive and relevant by local sourcing at levels that may be even higher than 30%.
A 'one size fits all' approach — as the Cabinet proposal seems to believe in — clearly ignores the variety of consumers and producers that exist. Even Indian companies making handsets, computers or garments follow such disconnected norms on sourcing. To make this proposed policy an effective reality that benefits the economy, and if there is to be a sourcing requirement, then it ought to be phased over a realistic business cycle and not limited to SMEs including the handicrafts sector.
Sharif D Rangnekar is CEO, Integral PR. The views expressed by the author are personal.