Coming within a week of finance minister Nirmala Sitharaman unveiling a raft of measures to boost growth, the union cabinet headed by prime minister Narendra Modi, on August 28, 2019, liberalised foreign direct investment (FDI) rules in four sectors. The government allowed 100% foreign investment in coal mining and contract manufacturing, eased sourcing norms for single-brand retailers and approved 26% overseas investment in digital media. “The changes in FDI policy, will result in making India a more attractive FDI destination, leading to benefits of increased investments, employment and growth,” commerce minister Piyush Goyal told a media briefing, after the meeting of the union cabinet.
In single-brand retail trading (SBRT), the definition of 30% local sourcing norm has been relaxed and online sales permitted, without prior opening of brick and mortar stores. “Online sales will lead to the creation of jobs in logistics, digital payments, customer care, training and product skilling,” Goyal added. Goyal said that the latest decisions of the cabinet are aimed to ‘liberalise and simplify the FDI policy, to provide ease of doing business in the country, leading to larger FDI inflows and thereby, contributing to the growth of investment, income and employment’.
Shubhranshu Pani, MD – retail services and stressed asset management group (SAMG), JLL India, termed the move as a ‘positive consumer-centric one that will bring the Indian market at par with other open market economies’. “The earlier restrictive policy environment did not support local outsourcing. Moreover, brands were not able to continue with the same quality parameters, as applicable in other international markets. As a result, interest and investments had tapered and were not forthcoming. However, now single-brand retailers will be able to start online sales before they set up brick-and-mortar stores. This new ease in FDI norms, will give a big boost to global brands and make the Indian market attractive for them. Primary segments that will benefit, would be electronics, mobiles, apparels and luxury goods.
“Under the new norm, retailers will need to open physical stores within two years. The measure will also help retailers, who otherwise used to incur an initial cost on setting up the physical store. However, a two-year period seems less as typical shopping centres have a 3 to 4 year construction period and many prime locations may have already been blocked. However, it would not be a deterrent as the brands can commence with e-commerce immediately, with limited physical stores and wait for the newer shopping centres to emerge,” he added.
Shishir Baijal, chairman and managing director, Knight Frank India, maintains that “The regulations on FDI in retail have come a long way, in terms of cash-and-carry wholesale trading, e-commerce and single-brand retail segments, where 100% FDI is allowed. Even while the local sourcing norms for a segment of single-brand retail entities were relaxed in the past to 30%, technologically-focused and specific product foreign retailers did face business constraint, in terms of procurement.
“With the relaxation of this local sourcing condition, foreign retailers will be able to decide the best combination of procurement quality and cost and have a higher willingness for participation in the country’s burgeoning consumption market.”
FDI is a major driver of economic growth and a source of non-debt finance for the economic development of the country. The government has put in place an investor-friendly policy on FDI, under which investment up to 100% is permitted on the automatic route in most sectors/ activities. These reforms have led to total FDI into India reaching USD 286 billion in five years from 2014-15 to 2018-19, as compared to USD 189 billion in the previous five years, he said. At USD 64.37 billion, FDI in 2018-19 is the highest ever investment received for any financial year.
Government allows 100 per cent FDI in single-brand retail via automatic route
The government has announced significant changes in its foreign direct investment (FDI) policy and allowed for 100 per cent FDI in single brand retail, without any government approval
January 10, 2018: Foreign players in single brand retail trade will now be able to set up their own shops in India, without government approval. This follows a Cabinet decision, on January 10, 2018, to allow 100 per cent FDI in single brand retail under the automatic route, while also easing local sourcing norms. Till date, 49 per cent FDI was allowed under the automatic route, while beyond that, the government’s approval was required.
“It has now been decided to permit 100 per cent FDI under automatic route for SBRT (single brand retail trading),” the government said in a statement. Industry players welcomed the development, saying it would help attract more foreign investments in the sector and boost the economy and generate employment. The government has also relaxed the mandatory local sourcing requirement of 30 per cent, which has been a long standing demand from players such as IKEA and H&M. Under the relaxed norms, a foreign retailer will be able to get credit from incremental increase in sourcing for its global operations from India, towards the mandatory 30 per cent local sourcing requirement, for its business in the country.
“What the government has said, is that the single brand retailers, who are also sourcing from India for their global markets for the incremental increase in their global sourcing, will be given credit for five years,” DIPP secretary Ramesh Abhishek said. As per the new rule, an SBRT entity is allowed to set off its incremental sourcing of goods from India for global operations during the initial five years, beginning April 1 of the year of the opening of its first store, against the mandatory sourcing requirement of 30 per cent of purchases from India. He, however, said, “They will have to comply with the 30 per cent local sourcing requirement.”
Reacting to the development, Retailers Association of India CEO Kumar Rajagopalan said: “In the long run, today’s reform would help boost employment, bring in wide product choices for consumers and help grow, not just the economy, but the nation as a whole.” Expressing similar views, Wildcraft co-founder Siddharth Sood said: “The consumer in the country will be the direct beneficiary of this move, as they will have access to the brands hitherto unavailable in the country, as it will be much easier for the international brands to set up shop in India.” This opens avenues for Indian firms to raise more funds from foreign investors and makes it easier for them to pursue larger domestic and global expansion strategies, Sood added.
CBRE chairman, India and south-east Asia, Anshuman Magazine said: “By allowing 100 per cent FDI in single-brand retail via the automatic route, the government is further strengthening its commitment to attract foreign investments into India and boost the overall economy.” Deloitte India partner Rajat Wahi also said global brands across different categories will be aided through this, providing further options to Indian consumers and improving India’s ranking in ease of doing business.