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Single-brand retail: Relaxing FDI norms is fine, but the shackles remain

The government’s proposed norms to relax conditions for foreign direct investment in single-brand retail, though coming a bit late in the day, are nevertheless welcome reforms. Of particular importance is the Centre’s plan to relax the mandatory 30 per cent local sourcing norm, cited as one of the major stumbling blocks for the likes of Apple to enter India’s retail market. Against the present system of considering local sourcing targets on a year-on-year basis, the new rules call for calculating the 30 per cent as a five-year average to begin with. After the first five years, the local norm is meant to apply on an annual basis. This change will provide foreign retailers some transition time, allowing them to adjust to local conditions and make financial adjustments. Single-brand retailers were mandated to source 30 per cent locally every year if their FDI crossed 51 per cent, even though 100 per cent FDI is allowed in the sector. The new norms also say that a foreign retailer’s export purchases from India would also be counted towards the mandatory 30 per cent. Companies can source goods from India for global use directly or via group entities in India or abroad, or indirectly through a third party. The rudderless sector will get a boost now, since the window for local outsourcing has opened up a bit.

If the proposed norms are operationalised, most single-brand retail companies can start online retailing before setting up a physical store in the country, something that was not allowed earlier. While it may still be difficult for players like Apple to set up shop in India (its contract manufacturer, Foxconn, sources very little from here), several other players, like furniture-maker Ikea and cellphone brands, could benefit from the new norms and start online stores. Ikea, which has established its presence here, has said it would increase sourcing from India. The new norms could help bring more FDI into the sector and boost local manufacturing as well as exports. India’s integration with global value chains will improve, benefiting MSMEs that have struggled for market access.

However, reforms in single-brand retail are still an unfinished affair. The Centre should stop micromanaging the retail sector through curbs on legitimate competitive practices. It should review its restrictions on marketing practices in e-commerce — marketplace entities won’t be able to buy more than 25 per cent from a single vendor or sell the goods of the companies in which the marketplace entity holds a stake — which target so-called foreign e-tailers, at a time when distinctions between foreign and domestic companies have become increasingly hard to make. After all, the opening up of the retail space so far has not driven kirana stores to the wall, as was predicted by sceptics. To set terms for foreign investors is all very well, but not at the expense of throttling innovation.

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