Swedish furniture retailer Ikeas proposal to set up shop in India was cleared by the government on Thursday. This is the first major retail foreign direct investment project the government has seen through since it opened up the sector to larger foreign participation in September last year. Single brand retailers were allowed to bring in 100 per cent FDI while 51 per cent FDI was allowed in multi-brand retail.
The Ikea proposal cleared by the Cabinet had wound its way through the government for almost eight months as the two sides debated on the extent of local sourcing that the company must comply with and whether it can provide shoppers with facilities like cafe under the rubric of the foreign direct investment rules.
The company plans to invest Rs 10,500 crore in India as per the Cabinet papers. CEO Mikael Ohlsson had met commerce minister Anand Sharma in St. Petersburg in June 2012 to confirm they will invest in India for approximately Rs 4,200 crore in the first stage and an additional Rs 6,300 crore (euro 1.5 billion). Ikea put in its formal application in October last year,while the foreign investment promotion board referred it to the Cabinet in March this year.
The company plans to initially establish 25 retail stores through a wholly owned subsidiary format.
Ohlsson had also communicated to Sharma their decision to raise existing sourcing for their global operation from India significantly.
However,Ikea had informed the minister in their first meeting they were uncomfortable with the compulsory sourcing norms that mandated that the retailers will have to procure 30 per cent of their products from small scale and micro industries. The mandatory provision was changed in September to preferably.
Commenting on the clearance by the Cabinet,Sharma said,This will be the biggest foreign investment in the retail segment till now and will provide an opportunity to Indian small and medium enterprises in a wide range of labour intensive sectors for integrating into global value chain. On the other hand,it will also provide a diverse choice for the Indian consumers for a wide range of products. This decision has once again re-affirmed the commitment of government for maintaining a liberal economic agenda.