Definition of investment in backend infrastructure and 30 per cent sourcing clause may be changed

Yielding to pressure from multinational retail giants and worried at not a single proposal having come through in the past nine months, the Manmohan Singh-led government is set to “dilute” various conditions, including effecting a change in the definition of investment in backend infrastructure and the 30 per cent sourcing clause, brushing aside opposition from the Micro, Small and Medium Enterprises (MSME) Ministry.

Furthermore, with the Commerce and Industry Ministry at the spearhead, the government proposes to increase the number of cities to be covered under the policy for 49 per cent FDI in multi-brand retail trade. This will be done by amending the clause to permit cities or States with less than 10 lakh population to allow opening frontend stores. According to a Cabinet note, proposed to be put up before the Cabinet Committee on Economic Affairs on Thursday and accessed by The Hindu, the clause requiring 30 per cent sourcing from small-scale industries will be scrapped. Under a new policy, medium-scale industries, with a total investment not exceeding $2 million, will be made eligible for sourcing of manufactured/processed products.

It is argued that the present condition of making those industries that outgrow this status ineligible for fulfilment of mandatory local sourcing would result in loss of business for small industries and also discourage retailers from developing a supply chain. It proposes that this requirement would be reckoned only at the time of first engagement with the retailer and such industries will continue to qualify even if they outgrow the investment of $2 million during their relationship with the retailer.

However, in its comments on the Cabinet note, the MSME Ministry has said it does not favour an open-ended engagement of MSMEs with their retailers under the provision for 30 per cent procurement even if they outgrow the investment limit. “The Ministry is of the view that a three-year period from the day a micro/small/medium enterprise outgrows the investment limit of $2 million would provide the required space to equip itself independently to make supplies to the retailer without being covered under the 30 per cent procurement. The Ministry supports continuation of engagement of the MSME enterprise with the retailer for… three years from the day it outgrows the investment limit as per the current policy. This would pave the way for a larger number of MSMEs being covered under the provision of 30 per cent procurement by retailers in multi-brand retail trade.”

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