Blow hot, Blow cold

IKEA's path into Indian retail made tougher.
Blow hot Blow cold

The flickering approach of the Indian government in dealing with IKEA, is putting the country in shameful shade. The government is oscillating between rigidity and flexibility; hardly letting IKEA to go, again stepping back for the populist strategy.

Amidst a lot of speculation about the single brand FDI policy being made a bit more considerate for IKEA, DIPP official on Monday said, “We are not bringing about any changes in the single-brand retail policy as of now. We plan to place all concerns raised by IKEA on domestic sourcing norms before the Foreign Investment Promotion Board (FIPB) once the company replies to the communication sent by us on the issue”.

Swedish furniture retailer IKEA announced an investment of as much as Rs 10,740 crore in India. The plan includes opening of 25 retail stores in a wholly owned subsidiary. But a condition requiring 30 per cent local sourcing from small industries in India has been a stumbling block. Small industries are defined as those with a total investment in plant and machinery not exceeding USD one million. Eventually IKEA is waiting for the government to relax the sourcing norms. The proposal says, they should be allowed to continue sourcing from small units even after the vendors have crossed the mandatory USD one million investment limits. The policy intends to support growth of domestic players but eventually on crossing USD 1 mn mark, the same policy will ensure that their business expires. IKEA has also demanded that the government should consider the sourcing amount over a period of 10 years. The Swedish retailer has also asked government to calculate the sourcing value to be based on the end sale price of the products supplied by small units, rather than the price at which they are sold to the retailer. 

Department of Industrial Policy and Promotion (DIPP) has made this clear that they will be placing these concerns forwarded by Swedish furniture giant before the intermediate agency that clears foreign investment proposals but will not make any changes in the FDI policy to accommodate their interests specifically. That intermediate agency is FIPB which has to send their views about the same. In the meanwhile, Micro, Small and Medium Enterprises Ministry (MSME) which can redefine the sourcing norms from MSMEs without cabinet’s consent, has opposed any unilateral decision by the DIPP to change the sourcing norms and the definition of MSME.  

The limit for investment in plant and machinery / equipment for manufacturing / service enterprises in accordance with the provision of Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 is:

Manufacturing Sector

Enterprises Investment in Plant and Machinery
Micro Enterprises Does not exceed Rs 25 Lakh
Small Enterprises More than Rs 25 Lakh but does not exceed Rs 5 Crore
Medium Enterprises More than Rs 5 Crore but does not exceed Rs 10 Crore


Services Sector

Enterprises Investment in equipments
Micro Enterprises Does not exceed Rs 10 Lakh
Small Enterprises More than Rs 10 Lakh but does not exceed Rs 2 Crore
Medium Enterprises More than Rs 2 Crore but does not exceed Rs 5 Crore

IKEA’s investment is the largest foreign investment in India’s retail sector and will give India a much needed booster in investor confidence, which is currently quite low due to the government failing to enact important reforms and at the time when gross domestic product growth slowed to nine-year low of 5.3 per cent in the March quarter.

IKEA, which is a large format furniture and home store, is known to invest heavily in skill building for small suppliers across the world. Such brands have a strong stake in building local suppliers not just for Indian market, but also for their global market, thus adding to employment and export revenue. IKEA is known to have large stores exceeding 100,000 sq. ft with café and restaurant options for shoppers.

After the 2G spectrum allocation scandal and all the licenses being cancelled, it is the turn of IKEA to face the unpredictable and indecisive behaviour of the Indian government. This would do nothing but keep away the foreign investors from the Indian soil, and that too at a time when the economy's going through a nine year low slowdown.



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