* Retailer to open 25 stores in Asia's third largest economy
* Intends to source $1 bln stock from India in coming years
* Government takes small step towards restoring investor
(Adds quotes, details)
By Nandita Bose and Matthias Williams
MUMBAI/NEW DELHI, June 22 Swedish retailer IKEA
, the world's largest furniture maker, is opening up in
India, marking a crucial step for the Indian government whose
policy flip flops related to foreign investment have damaged
The company, known for huge stores selling flatpack
furniture and accessories, said it would invest 1.5 billion
euros ($1.9 billion) to open 25 stores in Asia's third-largest
economy after initially balking at India's sourcing
IKEA's plans, announced by the Indian government after a
meeting between the company's CEO and India's trade minister in
Russia, could give a boost to the embattled government of Prime
Minister Manmohan Singh, which was forced in December to
backtrack on plans to allow in foreign supermarket operators.
While the government removed foreign investment caps in
single-brand retail in January, it imposed a condition that
foreign retailers source 30 percent from local small and
mid-sized enterprises, dampening the enthusiasm of retailers for
"It's a baby step but it has definitely sent the right
signal out ... The government is trying to convince
international investors, India is still open for business," said
Devangshu Dutta, consultant with Third Eyesight, a retail
The Indian economy which grew at its slowest pace in nine
years has been badly hit by political roadblocks to economic
policymaking battering corporate investor sentiment.
But the company, following similar moves in China and
Russia, plans to cash in on India's burgeoning urban middle
class, which, having grown up on pop culture, generates a strong
demand for owning international brands and lifestyle products
such as furniture.
On Friday, India said the company had discussed its
reservations over the sourcing policy with the government.
"IKEA had certain reservations about sourcing norms which
were discussed with the DIPP (Department of Industrial Policy
and Promotion) officials; suitable answers of which were
provided leading to the decision to invest," the Indian
government said in a statement.
The company does not yet have any stores in India but
sourced $450 million worth of goods from the country last year,
a figure it aims to lift to $1 billion in coming years.
It sources goods such as textiles and carpets from 70
suppliers and 1,400 sub-suppliers in the country, the company
"The mandatory sourcing clause that requires goods to be
sourced from small and medium enterprises will remain a
challenge," IKEA spokeswoman Malin Pettersson Beckeman told
Reuters by phone on Friday.
The Singh government is keen to bring global supermarket
chains such as Wal-Mart Stores Inc and Carrefour SA
into India, in hope of improving the efficiency of
supply chains in a country where roughly one-third of fresh
produce rots before it gets to market.
However, foreign direct investment in supermarkets has been
opposed by owners of one-off shops, which account for roughly 90
percent of India's $450 billion retail sector, as well as by
members of the ruling coalition.
IKEA said its investment will be made over 15 to 20 years.
India's Commerce Ministry said IKEA will initially invest
600 million euros and a further sum of up to 900 million.
"These investment estimates have been drawn up based on our
experience in countries like China and Russia," Beckeman said.
Industry officials, however, said that the Swedish firm's
entry will not really shake things for the domestic market given
the number of stores it plans and the period of investment.
"It's not going to shake up the entire domestic market but
it will set a benchmark model for others to follow in India's
nascent furniture and home products market," Dutta said.
($1 = 0.7933 euros)
(Writing by Sanjeev Choudhary; Editing by Tony Munroe and David