The easing of local sourcing norms promised to foreign single-brand retail companies in the Union Budget 2019-20 is likely to be in two areas. Such companies could have the freedom to sell their final products not just locally but also export it and at the same time benefit from a more flexible time span for meeting the average sourcing requirement.

“When I took charge of the Department of Policy for Investment and Internal Trade, I realised that it is not a good idea to restrict foreign investors in single-brand retail using 30 per cent domestically sourced inputs to sell the products only in local stores. Instead, such products should also be allowed to be exported,” Commerce & Industry Minister Piyush Goyal told BusinessLine .

The government is therefore looking at allowing the items manufactured in the country by single-brand retailers with FDI, for which 30 per cent domestic sourcing has taken place, to be exported. “By allowing exports you get double benefit. Your manufacturing increases in India and you also get foreign exchange. Foreign investors also bring in new technology,” Goyal said.

The proposed policy change will remove a major roadblock in the previous policy, said Pinakiranjan Mishra, Partner and National Leader, Consumer Products and Retail, EY India. “Since many brands source from India it will enable their entry. It also opens a window for players who do not have a large market in India but can set up a retail business along with manufacturing set up,” he said.

While India allows 100 per cent FDI in single-brand retail, it is subject to the 30 per cent domestic sourcing condition. Last year the government somewhat relaxed the norm by stating that a foreign retailer would 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. Single brand retailers like furniture-maker Ikea and electronics company Apple, however, sought more relaxations.

In the new round of proposed easing of conditions, there will also be more flexibility in the time span for meeting the 30 per cent sourcing requirement, Goyal said. At present, the sourcing requirement has to be met as an average of five years’ total value of goods purchased, starting April 1 of the year of opening of the first store. Subsequently, it needs to be met on an annual basis. “What we are saying now is that we will look at blocks of five years and thereafter a block of three years for meeting the sourcing condition,” Goyal stated. The Minister added that more flexibility in meeting the given conditions will provide greater ease to investors and they would not live under the constant fear of slipping on the requirements in a particular year.

However, Anil Talreja, Partner, Deloitte India pointed out that the mandatory condition of 30 per cent sourcing was the core of the issue. “The sourcing condition has made some global retailers nervous. In my view, giving more time to meet this requirement may not excite these retailers as they are looking at a full exemption,” he said.

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