Large foreign companies, including iPhone maker Apple, Swedish furniture giant Ikea and fashion retailer H&M, will be able to bolster their presence in India, as the government on Friday relaxed key aspects of the 30% local sourcing rule for foreign direct investment (FDI) in single-brand retail.
Seeking to create a manufacturing eco-system at a time when several foreign companies are looking to shift out of China to beat an escalating global trade war, the Cabinet Committee on Economic Affairs also decided to allow up to 100% FDI in contract manufacturing via automatic route. Tech giant Apple and many pharmaceutical companies that rely on contract manufacturers will gain. While 100% FDI was already permitted in manufacturing under the automatic route, the rules for contract manufacturing were not clearly spelt out earlier.
The government introduced several flexibilities in the 30% sourcing rules that are applicable to those single-brand entities where FDI is above 51%. Single-brand retail entities can adjust their entire procurement of goods from India for their global operations against their mandatory 30% local sourcing requirement. Even sourcing for global operations done through group companies (resident or non-resident), or indirectly via third parties such as contract manufacturers will be counted towards domestic sourcing obligation.
Similarly, all procurements made from India, be it for domestic sales or exports, by such an entity will be counted towards local sourcing. The changes are likely to help Apple the most, as it produces phones through its contract manufacturers like Foxconn and Wistron. As per the extant policy, local sourcing by, say, Foxconn and its exports for Apple are not counted towards the American tech giant’s sourcing obligation. This restricted the iPhone maker from setting up its manufacturing eco-system here, both for domestic sales and exports, said analysts.
The CCEA also cleared subsidies to export up to 6 million tonne of sugar, which will cost the government Rs 6,268 crore. While this will temporarily help reduce the massive surplus stocks—currently pegged at 16.2 million tonne, according to I&B minister Prakash Javadekar — and prop up realisations of stressed sugar mills, unless the cane pricing policy is reformed, the problem of massive arrears will recur in regular intervals. Under the extant rules, while procurement for domestic sales is counted towards sourcing obligation, that for exports is factored in for only five years.
This five-year cap will be removed. Also, currently only that part of the global sourcing is counted towards local sourcing requirement which is over and above the previous year’s value. Briefing reporters, commerce and industry minister Piyush Goyal said the reforms in FDI norms in various sectors will “boost exports, promote Make in India and create massive job opportunities”.
As per Wednesday’s CCEA decisions, single-brand retailers will now be permitted to set up online stores before opening brick-and-mortar shops, although they have to establish offline stores within two years conducting online business. At present, such retailers are allowed to sell online only after they set up physical outlets.
Domestic sourcing rule was such a challenge that several companies, including Apple, Xiaomi and LeeCo, had earlier sought exemptions from it on ground of their technology being state-of-the art. However, while Apple’s application was rejected in 2016, Xiaomi and LeeCo had subsequently withdrew their applications, realising such a waiver was hard to come by.
In 2012, the government allowed 100% FDI in single-brand retail under government approval route. In January 2018, the government allowed up to 100% FDI in single-brand retail via automatic route, scrapping the need to seek its approval beyond 49%. However, the companies where the FDI is above 51%, they have to comply with the 30% local sourcing rules.
Similarly, the government made it clear that up to 26% FDI will be permitted in the booming digital media entities, with government approval. Prior to this move, while up to 26% FDI was allowed in print media, up to 49% was permitted in broadcasting content services — both through government approval. However, the rules were silent on the digital media space, which assumed prominence only in recent years, with the emergence of several such entities.
Atul Pandey, partner at Khaitan and Co, said the government has also cleared a long-standing ambiguity in contract manufacturing and has now permitted 100% FDI under the automatic route, subject to the execution of a legally-tenable contract. “This move is expected to give a big boost to sectors like pharmaceuticals, which majorly rely on contract manufacturing,” he added.
The easing of local sourcing rule “protects the domestic sourcing ecosystem as well as allows global companies to meet the 30% sourcing norms in line with their core business model”, said Subhendu Roy, partner at AT Kearney. Also, global firms can now invest in a contract manufacturer thereby speeding up their entry into the market. Setting up factories in India takes a lot of time. It also a benefit to Indian contract manufacturers, he added.