Commercial compulsions, not government diktat, are the best way to enforce local sourcing by foreign retailers.

Having messed up badly in foreign direct investment (FDI) in multi-brand retail, the Government appears to be doing an encore in single-brand retail as well. While the former has run into political obstacles, even the permission given for 100 per cent FDI in single-brand retail, as against the existing limit of 51 per cent, is stuck due to question marks over local sourcing norms imposed by the Government. These mandate foreign retailers like IKEA and United Colors of Benetton — who hawk single product categories such as furniture or clothing under their own brands — to source at least 30 per cent of the value of products they sell from small manufacturers within India. This precondition can possibly be implemented in multi-brand retail, which involves selling everything from fruits and vegetables to dry groceries, home furnishings and electronics under the same chain of stores. A Walmart or Tesco, provided they are allowed to set up shop in the first place, may procure potatoes, basmati rice or apparel domestically even without being asked. But how can one expect the makers of Omega watches, Swarovski crystals or Gucci leather goods to do the same — buying from artisans, craftsmen and small industries whose investments in plant and machinery cannot technically exceed $1 million?

Whether it is in single or multi-brand retail, such requirements are quite unnecessary, leave alone the operational challenges of their implementation. Ultimately, even an IKEA may not be averse to procuring curtains and lamp shades from suppliers in Panipat or Moradabad: The problem is in making them mandatory, which means having to maintain separate accounts and appointing statutory auditors just for this purpose. All these only add to transaction costs, leading the retailers to choose softer options such as franchise arrangements and brand licensing, as opposed to making large direct investments with real potential for creating jobs. These jobs would be not just at the point of sourcing — which seems to be the Government’s sole focus — but all along the chain extending from warehousing, transport and distribution to the final retail end.

The Government should drop this insistence on local sourcing for allowing 100 per cent FDI, at least in single-brand retail. If foreign retailers are serious about India – IKEA committing to invest €1.5 billion would suggest so – they cannot afford to simply stock their stores with imported products in a scenario of a weakening rupee. How much to import and from which domestic manufacturer to source, are decisions best left to the commercial judgment of the retailers themselves. By creating artificial distinctions between not just single-brand and multi-brand retailers, but also between 51 per cent and 100 per cent in the case of the former, the Government is sending out wrong signals to foreign investors. And this is quite avoidable today, when the country needs both foreign exchange and investments.

(This article was published on July 10, 2012)
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