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India Eases FDI Rules for Local Sourcing

India may be on its way to becoming the world’s most open economy for foreign direct investment.

On Monday the country relaxed its rules on sourcing for FDI from single brand retailers, following a March announcement that it would allow 100 percent FDI for e-commerce market, letting foreign e-commerce businesses enter into transactions with sellers on their platforms for business-to-business.

India’s existing rule on FDI required retailers to sell at least 30 percent locally sourced goods. Now, though companies will still have to meet that requirement, they’ll have more time to do it.

For single brand retailers, Indian Prime Minister Narendra Modi said in a press statement Monday, “It has now been decided to relax local sourcing norms up to three years and a relaxed sourcing regime for another five years for entities undertaking Single Brand Retail Trading of products having ‘state-of-art’ and ‘cutting edge’ technology.”

What that means is that instead of issuing foreign retailers a complete waiver on the 30 percent local goods stipulation, now they can be exempt for three years, or an additional five (for a total of eight years) if their goods are considered cutting edge or state-of-the-art technology, though no one has yet confirmed what will be deemed ‘cutting edge’ or ‘state-of-the-art.’

The idea is to promote local manufacturing and eventually get foreign companies to source from India—all part of Modi’s ‘Make in India’ effort.

Though the country is touting the move as a relaxation, Kalpesh Maroo, partner at BMR & Associates LLP, finds it the contrary.

“It appears that the entities engaged in trading of such [cutting edge products] would now need to comply with the sourcing norms over a period of eight years (three plus five) as against an earlier norm where the government had the option to completely waiving the sourcing norms for such entities,” Maroo told The Hindu Business Line. “If this is indeed the case, this move would adversely impact the fate of several companies, especially in the technology space, that were hoping for a complete waiver on the grounds that the products proposed to be sold involved state-of-the-art technology.”

One such company would be Apple. The i-technology retailer had sought a waiver from the country’s sourcing requirements entirely so that it could open Apple exclusive stores, but now it seems the company will work toward meeting the requirement over three years, or eight if they win the ‘cutting edge’ title.

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Major retailers had been struggling to set up shop in India as they faced too-rigid rules for investment, but Modi believes easing the rules will spell big changes for the country.

“Today’s amendments to the FDI Policy are meant to liberalize and simplify the FDI policy so as to provide ease of doing business in the country leading to larger FDI inflows contributing to growth of investment, incomes and employment,” the prime minister said.