Swedish firm IKEA, which has proposed to invest Rs. 10,500 crore to set up single brand retail stores in India, has asked the government that it must be allowed to continue sourcing from small units even after the vendors have crossed the mandatory $1 million investment limit.
It has also proposed that the calculation of the 30 per cent norm be done for cumulative periods of 10 years of operations starting with the approval of the present application.
As per the present single brand FDI policy, global retailers would have to source 30 per cent of their requirement from Indian small industries which have a total investment in plant and machinery not exceeding $1 million.
The company, which has filled the application with the Department of Industrial Policy and Promotion (DIPP) on Friday, said that if IKEA group were to comply with this norm, such units will very soon outgrow the stipulated valuation (of $1 million) and become large set-ups.
Owing to the restriction contained in the FDI policy, such small industries may lose out on vast volumes of business from the group, it said.
Moreover, it said that if the company would keep on changing its vendors, such abrupt change would also disrupt the quality of the products that would be released in the market and also the supply chain operations of IKEA group.
“The biggest impact would be on the small industries themselves, as if IKEA group stops doing business with such enterprises, several such industries using IKEA’s designs and expertise would have to close down and hundreds, if not thousands of workers will be rendered unemployed,” the company said in its application.
It said that the company cannot be expected to keep changing its local vendors as it will gravely impact the supply chain, product quality, product cost and consequently the revenues of the company.
IKEA’s proposal comes at a time when the DIPP is considering to relax the 30 sourcing norms as other brands like Apple and Rolex may not be able to meet the requirements.
“DIPP is discussing with MSME ministry for the relaxation,” an official said.
The Swedish furniture retailer further said in its application: “Also, if IKEA group were to time and again revert to less industrialised set-ups (i.e. below the stipulated valuation of $1 million), the firm would not be able to produce and provide in high volumes low-cost high quality products to the Indian customers. This will restrict the growth of IKEA in the Indian market leading so far.
”...IKEA group would continue to source products, components and materials from them and count the value of such sourcing to comply with the mandatory sourcing requirement from such small industries.”
It also said that complying with the sourcing norm is not a day one requirement, as the gestation period of a typical IKEA retail store is 3-5 years and it would be impossible for the company to meet this requirement from day one or anytime soon thereafter.
“Accordingly, IKEA proposes that adherence to the mandatory sourcing requirement be computed, certified and checked for cumulative periods of 10 years each from the date of approval of the present proposal by the FIPB and the sourcing values would include the export values of sourcing by the IKEA group companies from the small industries,” it added.