* India may relax sourcing polices for retailers -official
* Sourcing policies seen as major barriers for foreign firms
* India may roll out supermarket reform within weeks
By Matthias Williams and Nandita Bose
NEW DELHI/MUMBAI, July 19 India's government
appears set to relax heavily criticised sourcing rules for
retailers, anxious not to scare off IKEA -- one of the few big
name firms that has said it will invest in the country -- or any
others willing to follow.
India kicked open the door to foreign retailers in January
when it removed an investment cap for single brand chains to set
up shop but then shot itself in the foot by imposing a
requirement that companies had to source 30 percent from small
IKEA and others have balked, and the government's
response is being seen as a test case of how well it can revive
flagging investor confidence at a time when economic growth has
slowed to its weakest in nine years.
Signs point to backtracking on the part of the government,
with a top official closely involved in framing retail policy
telling Reuters that key clauses may be relaxed although the
government was still discussing the pros and cons as well as the
extent of any relaxation.
"We are in the process of finalising our views about all
this," said the official, asking firms to "be a little patient".
Analysts are confident there will be an easing of the rule.
"The government is in damage control mode. It realises it
has sent out a wrong signal by putting the thirty percent
sourcing requirement for foreign retailers," said Saloni Nangia,
senior vice-president for retail at Technopak consultants.
Prime Minister Manmohan Singh this month also held up the
Swedish furniture giant's planned $1.8 billion investment as an
example of investor confidence, while the trade minister said
its already substantial amount of sourcing from India would be
taken into account.
New Delhi is also pushing to resuscitate a reform to allow
foreign retailers that sell many brands -- supermarkets like
Wal-Mart Stores -- to invest in the country with a 51
percent cap on ownership. At the moment, they are only allowed
to operate in a wholesale capacity.
The government's plans were scotched last year by a
political backlash but India could launch the policy within
weeks if the political climate is right, the official involved
in retail policy said.
"We are pushing, to the extent we can," he said. "Multibrand
retail is only a pause. There are no major issues there."
The sourcing rule for single brand retailers currently
stipulates that local suppliers must not have more than $1
million invested in plant and machinery.
The rule was designed to ensure that India's manufacturing
sector, which pales next to China's, benefits from foreign money
rather than being muscled aside by imports. But it represents a
headache for retailers looking for scale and reliable, high
IKEA has asked for a 10-year window to comply with the rule
-- a time frame for the government has said is too long.
"It will take us time to fully live up to the requirements,"
said Josefin Thorell, a spokeswoman for IKEA. The company has
declined to comment on how it would respond if it did not get 10
UK-based footwear retailer Pavers, the only other retailer
besides IKEA to apply for wholly owned operations since the rule
change, is asking that sourcing not be measured based on the
value of goods sold.
"Our request along with the industry is that 30 percent of
that should be on the cost price instead," said Utsav Seth,
chief executive of Pavers' Indian operations, although he added
that Pavers would comply with the current rule if its request
In addition to ironing out these policy matters, the
government is also rethinking what to do if a supplier grows
beyond its original size. According to a policy document in
November, an Indian company would be disqualified from supplying
a foreign firm if it grew beyond its original $1 million
"I would call it penalising success," said Devangshu Dutta
of Third Eyesight, a retail consultancy.
"If you are successful in actually helping small companies
grow, they would be penalised because they would not be able to
supply you any more. And you would be penalised for helping them
Another rule, one that says an investor must own the brand
it is proposing to bring to India, may also be relaxed, said the
official involved in retail policy.
This has tripped up Spain's Inditex S.A. which
applied for permission to bring a second clothing brand, Massimo
Dutti, to India in addition to its flagship clothing brand Zara.
The government has put that proposal on hold after the
application was not submitted by brand owner Inditex but by its
wholly owned unit Zara Holdings BV.