How new rules of single-brand retail and contract manufacturing will benefit industry?

by Apparel Resources News-Desk

02-September-2019  |  5 mins read

Stores
Image Courtesy: https://propstory.com

Recently the Union Cabinet chaired by Prime Minister Narendra Modi approved the proposal for Review of Foreign Direct Investment (FDI) in various sectors, and apparel industry is directly related to the easing of sourcing norms for single-brand retailers.

Overseas brands like H&M and IKEA, which are sourcing from India for overseas as well as their stores in India, are delighted with the decision and say that it is encouraging.

The Government has claimed that the changes in FDI policy will result in making India a more attractive FDI destination, leading to benefits like increased investments, employment and growth.

Further, manufacturing through contract contributes equally to the objective of ‘Make in India’. FDI now being permitted under automatic route in contract manufacturing will be a big boost to the manufacturing sector of India.

It has been claimed that easing local sourcing norms for FDI in Single Brand Retail Trading (SBRT) will lead to greater flexibility and ease of operations for SBRT entities, besides creating a level playing field for companies with higher exports in a base year.

The retail trading through online trade can also be undertaken prior to opening of bricks-and-mortar stores, subject to the condition that the entity opens bricks-and-mortar stores within 2 years from the date of starting online retail.

Online sales will lead to creation of jobs in logistics, digital payments, customer care, training and product skilling. The foreign retail entities, which were earlier sceptical about entering the Indian market due to high investment of setting up physical stores, can now explore the market by starting to trade through online stores without opening such stores at least for 2 years.

Now SBRT entities having more than 51 per cent FDI can manage their 30 per cent sourcing requirements irrespective of whether the sourcing is done for local or global operations.

Sourcing of goods from India for global operations can be done both directly or indirectly through a legally tenable agreement with unrelated third parties. All procurements made from India by the SBRT entity for that single brand shall be counted towards local sourcing, irrespective of whether the goods procured are sold in India or exported. Further, the current cap of considering exports for 5 years only is proposed to be removed, to give an impetus to exports.

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. “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.

As new norms will help a lot of overseas brands to enter India, it has been reported that US-based lingerie brands, Japanese apparel and athleisure brands, French outdoors brands are all planning to start online operations in India over the next few months.

“We see this supporting the ease of doing business in India and driving in larger investments from global companies,” said Janne Einola, Country Manager, H&M India.

The extant FDI policy provides for 100 per cent FDI under automatic route in manufacturing sector. There is no specific provision for contract manufacturing in the policy. In order to provide clarity on contract manufacturing, it has been decided to allow 100 per cent FDI under automatic route in contract manufacturing in India as well. Manufacturing activities may be conducted either by the investee entity or through contract manufacturing in India under a legally tenable contract, whether on Principal-to-Principal or Principal-to-Agent basis. Contract manufacturing is expected to provide a major fillip to the Indian economy and create more jobs.

Share This Article