The government is likely to provide some relief to foreign multi-brand retail firms planning to set up shop in India on the clause mandating them to source 30% of their procurement of manufactured and processed items from small and medium enterprises (SMEs) with a total investment in plant
and machinery not exceeding $1 million.
A senior department of industrial policy and promotion (DIPP) officer told FE that retailers would be provided a buffer in cases where SMEs grow beyond the stipulated $1-million mark on the back of supplies to the retail chains. “Such retail chains may be given three years to make a move from such SMEs to new ones,” the official said. The logic is that retail firms would need time to spot and train new SMEs.
Though the DIPP had recently come out with clarifications on the retail policy, this particular provision was not mentioned as it was under consideration then.
Once officially announced, this clarification will help retailers like Wal-Mart, Carrefour and Tesco firm up plans to enter India.
According to the clarifications, the 30% sourcing will be considered only with reference to the front-end store and as such a multi-brand retailing entity cannot engage in any other form of distribution.
However, the department is yet to clear the air on two contentious issues relating to sourcing restriction among group companies and the requirement of 50% investment in back-end infrastructure within three years of the first tranche of foreign direct investment. Industry sources said that clarity on these two clauses along with the one relating to sourcing from SMEs are required before any business decision can be taken by any major overseas retail firm.
The government is concerned as no proposal has come so far in multi-brand retail since it allowed foreign retailers to take up to a 51% stake in Indian front-end stores with strict riders. The government has made the conditions for such investments tougher by clarifying that the mandated investments can only come through greenfield ventures and not brownfield ones.