The Union Cabinet Wednesday cleared the proposal to ease the local-sourcing norms for single-brand retailers, in addition to allowing 100 per cent foreign investment in coal mining and contract manufacturing as part of the government’s efforts to boost economic growth.
Also, a decision to prescribe a 26 per cent FDI limit in digital news media via the government route has been spelt out. The proposal to relax local-sourcing norms was announced by Finance Minister Nirmala Sitharaman in the Budget for 2019-20 and the move is expected to benefit multinational companies operating or planning to begin operations of retail stores with items sold under a single brand. These include US technology major Apple, Swedish firms Ikea and H&M among others.
The Cabinet’s announcement on FDI has come within a week of Sitharaman unveiling a slew of measures to drive higher economic growth.
“The changes in FDI policy will result in making India a more attractive FDI destination, leading to benefits of increased investments, employment, and growth,” Commerce & Industry Minister Piyush Goyal told reporters at a Cabinet briefing.
He said 100 per cent FDI under automatic route in coal mining and sale of coal, as also associated infrastructure activity, has been allowed to help attract international players to create an efficient and competitive coal market.
Boosting investor sentiment
The latest measures come on the back of the stimulus announced last week. This will boost investor sentiment and signal that the government is proactively responding to voices of distress in the industry.
Currently, 100 per cent FDI under automatic route is allowed in coal and lignite mining for captive consumption in power projects, iron and steel and cement units, which has not been extended to the sale of coal and mining, including associated processing infrastructure such as coal washery, crushing and coal handling.
An analyst tracking the sector said while the opening up of the coal mining sector sends out “the right signal”, the government needs to first start auctioning the merchant mines. “Once the auction of merchant mine starts, it will take 4-5 years to reap benefits of the reform. Also, investment in infrastructure needs to be made to evacuate all the extra coal that will be mined as a result of this move,” the analyst said.
Kameswara Rao, Leader — Energy, Utilities and Mining, PwC India, called it a positive step for the coal sector and said: “The discoms are really the beneficiaries of this as they can now attract larger global operators with lower cost of capital to undertake end-to-end coal mining of their allocated blocks to reduce the fuel costs.”
Further, 100 per cent FDI under automatic route has been allowed in contract manufacturing to give a boost to domestic manufacturing. Currently, there is no specific provision for contract manufacturing in the policy. In order to provide clarity on contract manufacturing, it has been decided to allow 100 per cent FDI under the automatic route in India as well, Goyal said.
In single-brand retail trading (SBRT), the definition of 30 per cent local sourcing norm has been relaxed and online sales permitted without prior opening of brick and mortar stores.
“Online sales will lead to the creation of jobs in logistics, digital payments, customer care, training and product skilling,” Goyal said. The sourcing requirement has to be met, in the first instance, as an average of five years’ total value of the goods purchased, starting April 1 of the year of opening of the first store.
After that, it needs to be met on an annual basis. Single-brand retailers were not allowed to set off annual incremental procurement from India for their global operations against the domestic sourcing requirement after five years.
H&M said the move will help attract investment from global companies. “We are delighted! H&M has been sourcing from India since the last 30 years for its international markets, it’s great to see global sourcing is now part of the 30 per cent local sourcing norms. We see this supporting the ease of doing business in India and driving in larger investments from global companies,” H&M India Country Manager Janne Einola said.
The government has also decided to include global sourcing by the single brand retailers for adjusting their 30 per cent mandatory local sourcing norm.
Swedish furniture giant Ikea, which currently operates a store in Hyderabad, said the move would enhance ease of doing business in India. “Ikea India welcomes the relaxation of local sourcing norms for single brand retailers.
Government of India’s efforts to enhance ease of doing business for single brand retailers is encouraging. Ikea has been sourcing from India for more than 30 years,” Ikea India said in a statement.
With a view to providing greater flexibility and ease of operations to SBRT firms, the Union Cabinet decided that all procurement made from India by such entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported.
“Prevalent business models involve not only sourcing from India for global operations by the entity or its group companies, but also through an unrelated third party, done at the behest of the entity undertaking single brand retail trading or its group companies. In order to cover such business practices, it has been decided that ‘sourcing of goods from India for global operations’ can be done directly by the entity undertaking SBRT or its group companies (resident or non-resident), or indirectly by them through a third party under a legally tenable agreement,” a government statement said.
Further, the current ceiling of considering exports for five years only is proposed to be removed to give an impetus to exports.
“Adding exports to the local sourcing norms may help build larger capacities, reinforcing India’s stand as a potential global manufacturing hub. Allowing single brand retailers to start online stores, while meeting local sourcing norms, aligns well with the ‘Digital India’ initiative, giving them time to build their brick-and-mortar presence in parallel,” said Harsha Razdan, Partner, Consumer Markets, Life Sciences and Internet Business, KPMG in India.