Rewrite the rules for FDI in single-brand retail

The government should relax some of the rules that will bind foreign companies that set up singlebrand stores in India. These rules have kept almost all potential overseas investors at bay: the world’s largest furniture maker, Sweden’s IKEA, has asked for several clauses to be relaxed before it can enter and operate in India successfully. One rule says that retailers have to buy at least 30% of what they sell from Indian vendors.

This rule, intended to boost local manufacturing, could deter makers of very-high-value products. The government should stretch the 30% sourcing time line over several years, so that retailers can start by sourcing small amounts and then scale up as vendors’ skills and quality improve. Instead of sales, the government should apply the 30% rule to cost or landed value of imported goods.

Another irritant is a rule which says that domestic procurement will have to be done from vendors whose investments are less than $1 million. This is supposed to be a boost for small and medium enterprises but, if implemented, will achieve nothing. The flip side of small scale and low investment is high costs, low productivity and quality.

This will be a deterrent for potential investors. The investment ceiling could also encourage people to sidestep the rule by setting up large capacities and hiving each off into units valued at under $1 million. It is best to scrap these rules.

If the government is serious about boosting India’s manufacturing prowess, it should, instead, encourage overseas investors to start training local workers in specialised areas of manufacturing. There is no reason why, say, Indian leather workers cannot learn the fine art of Italian shoemaking or why local carpenters cannot manufacture quality furniture for IKEA.

Along with the financial and technological gains that overseas investment brings, it should bring the additional benefit of higher skill and productivity levels. That will not only make these investments more profitable, but more inclusive. The alternative could be jobless growth.