No mandatory sourcing from SMEs in single-brand retail FDI

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SME Times News Bureau | 15 Sep, 2012
What seems a setback to the country's micro, small and medium enterprises, the government Friday diluted the sourcing norms for foreign retailers looking to invest in the country, removing the earlier proposed clause to make 30 percent sourcing from SMEs mandatory.

"In respect of proposals involving FDI beyond 51%, sourcing of 30%, of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible," said an official press release on Friday.

The move came as a surprise as only recently Commerce Minister Anand Sharma had said that the government is not considering any proposal to do away with the mandatory 30 percent SME sourcing norm for Foreign Direct Investment (FDI) in single brand retail.

Earlier, it was mandatory for the overseas firms to source 30 percent of the goods from MSME.

In a press note released in January this year, the Centre had said, "In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/ village and cottage industries artisans and craftsmen. 'Small industries' would be defined as industries which have a total investment in plant & machinery not exceeding US $ 1.00 million."

However, on Friday CCEA modified the earlier condition, against which foreign retailers like furniture giant IKEA had voiced, terming the clause as an obstacle to investing in India.

The Cabinet said that investors have pointed out that it would be difficult to comply with this condition in the case of very specialized/high technology items.

"Global single brand retailers are often engaged in the business of retailing specialty/high-tech products. Such products are niche products, wherein it may not be viable for the foreign investors to build capacities wherever they engage in retailing, owing to the specialized requirements of quality and precision which the local small industry may not be able to provide. Investors are, therefore, of the view that the condition of 30% mandatory sourcing from Indian small industries/ village and cottage industries, artisans and craftsmen, is acting as a deterrent to the desired foreign investment in this activity," it said.

The other category of products related to the entire range from household appliances, utensils, furniture, crockery to furnishings, etc. are far more amenable to sourcing from MSMEs, village and cottage industries, artisans and craftsmen, it said.

"The proposed modification of the condition is envisaged to take into account the circumstances of both the specialized/high technology niche products, as well as the general category, covering a wide range of items," it was pointed out in the release.

". . . the amended condition relating to sourcing of 30%, of the value of goods purchased, being done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where feasible, is expected to benefit Indian producers, including the Indian handicrafts sector," the Cabinet viewed.