100% FDI in single brand retail will be limited due to local sourcing norms: Fitch Rating

KOLKATA: India's decision to allow full ownership of stores that sell a single brand of goods is likely to be limited due to the requirement to source 30% of the products locally, according to Fitch Ratings.

Till recently, foreign retailers could enjoy 51% ownership in single brand retail which was increased to 100% this week. Fitch says the local sourcing clause will limit the pace of change as retailers will have to determine whether they can get the same value and quality of goods from local firms and will have to set up new supply chain infrastructure.

The burden of this requirement would also vary greatly between retailers, as some already source many goods from India such as garments, while other high-end and specialist retailers might find it challenging to source enough of their stock locally. This may necessitate building up relationships with suppliers, which would presumably take time, says Fitch.

Fitch says the proposed reform in single brand retail do not increase the chances of imminent reform in ownership of multi-brand retail. It says any further attempt to reform the multi-brand rules is unlikely before the upcoming state elections in February and March and can be longer.

The Centre last year dropped its proposed reform to allow majority ownership to foreign companies in multi-brand retail due to pressure from coalition partners and the opposition.

Single-brand stores usually cater to the premium-end of the market. Fitch says many such foreign retailers have held back from entering India or have limited their expansion plans because of worries about protecting their brands while sharing a big stake with a local partner.

Full ownership would give retailers confidence that they would have complete control of their operations in India, helping encourage foreign direct investment, it says.