Indian Government May Scrap 30 Percent Local Sourcing Clause

July 22--NEW DELHI -- The department of industrial policy and promotion (DIPP) under the ministry of commerce is considering doing away with the 30 percent local sourcing clause for foreign investment in single-brand retail -- a provision that is viewed as restrictive by premium and luxury brands seeking to enter the Indian market.

If scrapped, it could ease the entry of foreign brands in categories such as clothing, electronics and luxury goods.

A clutch of industry bodies have had discussions with the ministry regarding possible changes to the existing single brand retail policy.

"The government has discussed making changes to the policy, albeit single brand only at this point," said a retail expert who did not want to be named. The points discussed included easing procedural issues and the possibility of reviewing sourcing clauses for foreign direct investment (FDI) in single-brand retail, the person added.

In 2012, the government allowed 100 percent FDI for single-brand retailers, making it mandatory that 30 percent of the value of goods be sourced from India, preferably from micro, small and medium enterprises (MSMEs), village and cottage industries and artisans.

On Monday The Economic Times reported that DIPP was considering doing away with the 30 percent domestic sourcing norm, as the single-brand retail policy needs to be eased further to allow foreign brands to invest in the country.

According to The Economic Times report, the government is also reviewing a plan to allow entry of sub-brands under the single-brand umbrella.

The government's willingness to further relax the FDI policy comes at a time when large supermarket chains are reviewing their India strategy. Earlier this month, French chain Carrefour SA said it would wrap up its cash-and-carry operations in India due to unfavorable policy conditions.

Single-brand retail is still getting an encouraging response from foreign retailers, said Saba Ali, senior associate for India at Altagamma Foundation (Fondazione Altagamma) that does advocacy work for foreign luxury brands. "Businesses want more control over their operations and their expansion, so 100 percent entry is preferred. The sourcing norm would take away the authenticity of a given luxury brand."

If implemented, the policy would be more favorable for luxury brands as local sourcing for high-end labels would remain a challenge.

"Most large mass-market brands procure goods from India, so if the sourcing clause is done away with, it will be hugely beneficial for more premium or luxury brands," said Rajesh Jain, managing director at apparel brand Lacoste India.

Copyright 2014 - Mint, New Delhi

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