How relaxing FDI in single brand retail helps industry

One of the measures announced by the government today is to further ease FDI norms in single brand retail. Though 100 per cent FDI was always allowed in single brand retail, the dampener was the clause that they had to mandatorily source from the Indian market. It was this clause which forced Swedish retailer Ikea from not entering the Indian market for a long time.

The government has now eased this norm by allowing single brand retail companies to limit their sourcing in India to just 10 per cent, provided they export 20 per cent of their products to other countries. This would mean consumers who shop for IKEA products outside of India would increasingly come across products with the 'Made in India' tag. "The export capability from this country will dramatically increase when these retailers start buying for their global requirement," says Kumar Rajagopalan, CEO, Retailers Association of India.

The government also allowed single brand retailers to have online only models as opposed to earlier, when they were not allowed to have a digital store unless they had a physical presence. This will surely encourage more single brand foreign retailers to enter India. Many global retailers have refrained from entering India due to exorbitant real estate costs.

However, it's not that single brand retailers have not found a way of coming into India. They may not have used the FDI route, but have partnered (through license agreements) with Indian retail conglomerates. Zara partnered with the Tata Group, while Marks & Spencer and Diesel partnered with Reliance Retail. By partnering with Indian companies these retailers don't need to adhere to FDI norms. So, will the easing of FDI norms mean more retailers would invest in India independently just as H&M and IKEA have? Industry experts say that while it will surely boost FDI in single brand retail, many will continue to prefer partnerships as they don't understand Indian market dynamics.

Despite the current slowdown, global retailers seem to be interested in the India story. The recent indirect investment of Amazon in Future Retail is an example. Will the relaxation of FDI norms actually lead to newer retail investments in India? Watch this space.

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