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Saturday, March 02, 2013

Gaurav Choudhury, Hindustan Times

July 10, 2012

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First Published: 22:03 IST(10/7/2012)

Last Updated: 22:43 IST(10/7/2012)

A test case in retail FDI

What has IKEA told the government? The iconic home accessories company wants India to tweak a clause that

will require it to source 30% of the value of goods sold in India from domestic small industries whose investment

do not exceed Rs 5.5 crore. IKEA wants that local firms, which will supply its inventory, should continue to

qualify as small industries even if their investments exceed Rs 5.5 crore after their association with the Swedish

giant.

Whats the logic for this argument?

Such firms will very soon outgrow the stipulated valuation and become competitive medium to large set-ups,

IKEA said in its application to the government seeking approval to set up stores in India.

What are the other major changes that IKEA wants in the governments policy?

IKEA also wants the compliance of the

mandatory 30% sourcing condition to be

calculated over a cumulative period of

10 years and not annually. The

government has originally notified that an

audit of these sourcing agreements will

be carried out by a statutory authority.

IKEA, however, has told the

government this should be done through

a process of self-certification and

subsequently by chartered accountants as opposed to a statutory audit.

What has been the governments response to these?

The government, it is learnt, is readying plans to ease foreign direct investment (FDI) norms for single brand retai

including the condition that global firms will have to source 30% of their merchandise requirements from local

small firms and artisans. Retail giants have been reluctant to set up shop in India citing restrictive conditions

including the 30% mandatory sourcing clause from small companies.

Whats fuss about FDI in multi-brand retail?

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In November last year, the government had decided to open up the retail sector to foreign investors through

FDI. The Union Cabinet had decided to allow FDI in multi-brand retail with a ceiling of 51% and 100% FDI in

single brand retail. The decision on FDI in multi-brand retail, however, was suspended following a strong politica

opposition.

What does it mean?

It means that global retailers such as Walmart, Carrefour, Tesco and others

cant set up mega deep-discount stores in India through joint ventures with

Indian firms where the foreign partner can hold up to 51% equity.

Why is there so much of opposition about FDI in multi-brand retail?

Opposition parties and small traders are worried that large deep-discount

stores of multinational corporations will drive street vendors and

neighbourhood mom-and-pop grocery stores out of business endangering

their livelihood.

How will the farmers benefit from the organised retail?

In the present dispensation, there is a complex chain of procurement involving

several middlemen. FDI in retail will create the enabling environment for

procurement, at least of fruits and vegetables directly from farmers offering

them higher income. At present, the price that a farmer gets for a kilo of

onions is about half of what it is sold to final consumers.

What about small and medium enterprises?

The government has made it clear that foreign retailers will have to source30% of their manufactured items from Indian small and medium retailers. By

engaging local producers, organised retail provides them with an access to a much broader consumer set. For

instance, a leading retailer operating in India has engaged a local pickle manufacturer in Amritsar and invested to

upgrade its equipment. As a result, this manufacturer is now present across markets that were traditionally

beyond his reach.

What about consumers?

The choice basket for Indian consumers will only get better, bigger, wider and cheaper. Organised retail

provides higher quality of goods on account of the predefined and stringent standards adopted by the retailers.And of course, the price will be cheaper. Studies have shown that consumers, on an average, will save at least

10% on daily use goods.

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