2021-05-07 11:57:11

Big FDI Moves for Single Brand Retail, Digital Media, Manufacturing

Highlights

The government recently decided to relax norms for Foreign Direct Investment in some sectors which include single-brand retail, digital media and the manufacturing sector as part of an all-out effort towards boosting the flagging economy.

The measures consist of investor-friendly policies like 30% sourcing from India for single-brand retailers, and legalization of contract manufacturing towards allowing 100% investment, as stated by the Union Minister Piyush Goel.

Sourcing relief for single-brand retail

The government on 25th August 2019, had relaxed local sourcing norms for single-brand retailers with foreign direct investment (FDI) and allowed them towards selling online even before setting up physical stores, in a move anticipated to benefit some of the world’s largest retailers which include IKEA, H&M and Uniqlo.

Presently, for single-brand retailers with over 51% FDI, the policy needs that 30% of the value of goods must be procured from India as part of the local sourcing prerequisite. This could be met as an average during the first 5 years, and afterward annually towards its Indian operations. Recently, the cabinet had decided that all procurements made from India through a single-brand retailer for that brand would be counted towards local sourcing, regardless of whether the goods procured are sold in India or exported.

Furthermore, the government has stated that sourcing of goods from India for global operations could be carried out directly by the entity undertaking single-brand retail or its group corporations (resident or non-resident), or indirectly through them through a third party.

At present, the policy offers that only a part of the global sourcing would be counted towards local sourcing requirement, which is over and above the earlier year’s value. The government had clarified that it has been decided that complete sourcing from India for global operations would be considered towards local sourcing requirement. The measure is considered towards being a big positive because it expands the scope of sourcing operations for retailers.

Also, brands now applying for FDI in single-brand retail would also are allowed towards commencing e-commerce operations even before they set up physical stores, subject to the condition that the entity opens physical stores within 2 years from the date of start of online retail.

The government has relieved this norm by allowing single-brand retail corporations to limit their sourcing in India to just 10%, provided they export 20% of their products to other nations. This shall mean consumers who shop for IKEA products out of India will increasingly come across goods with the 'Made in India' tag.

The government had allowed single-brand retailers towards having online-only models contrasted with earlier when they were not permitted to have a digital store unless they had a physical presence. This shall surely boost more single-brand foreign retailers towards entering India. Several global retailers have abstained from entering India because of exorbitant real estate costs.

Though, it is not that the single-brand retailers never found a way of coming into India. They might not have utilized the FDI route, but many foreign retailers have partnered through license agreements with Indian retail conglomerates. Through partnering with Indian businesses these retailers don't need to abide by the FDI norms.

Some of the world’s largest corporations have always sourced from India, particularly in apparel, sports, as well as home goods sectors. But there will remain some uncertainty whether easing the FDI norms will boost the retailers to invest more in India because may still prefer partnering with Indian companies as they do not fully understand the Indian market dynamics.

The other sectors where FDI rules have been eased are coal mining as well as contract manufacturing

The government might approve a proposal towards allowing 100% FDI in contract manufacturing.

In the present foreign investment policy, 100% foreign direct investment is allowed in the manufacturing sector under the automatic route.

A manufacturer is also permitted to sell goods manufactured in India through wholesale as well as retail channels, which includes through e-commerce, without the government's approval.

But, the policy doesn’t mention the contract manufacturing and it is not evidently defined in the policy.

Also, the government is looking at coming out with an explanation on the applicability of the foreign direct investment policy on the digital media sector.

The current FDI policy is quiet on the fast-growing digital media section.

In the print media division, 26% FDI is allowed through government approval route. Likewise, 49% is allowed in broadcasting content services through government approval route.

In the single-brand retail segment, the government shall consider a proposal of relaxing norms for complying with the mandatory 30% local sourcing standards through foreign single-brand retailers.

In the coal mining division, as per the proposal, foreign players shall be allowed to mine coal and sell it.

Presently, FDI is allowed for captive coal mining only.

Conclusion

These steps come in the backdrop of statements made by the government in the Budget. Nirmala Sitharaman, the Finance Minister had stated in her Budget speech that the government will examine recommendations of further opening up of FDI in aviation, media (animation, AVGC) as well as insurance sectors in consultation with every stakeholder in the direction of attracting more overseas investment.

FDI in India dropped 1% to $44.36 billion in the year 2018-19.

In the previous year, the government had relaxed FDI rules for many sectors, which include single-brand retail, non-banking financial corporations, and construction.

Foreign direct investments are vital for India, as it supports in improving the nation’s balance of payments condition as well as strengthening the rupee value against other global currencies, particularly the US dollar.