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India Eases Sourcing and Retail Requirements for Foreign Investors

In one fell swoop, India made itself one of the most open countries for foreign investment. The South Asian nation’s Prime Minister Narendra Modi released a long-awaited report on Foreign Direct Investment (FDI) changes this week, and the reforms are far reaching.

The report’s release came just days after the prime minister’s Bharatiya Janata Party (BJP) suffered defeat in a state election, and could be a play to regain political footing.

According to a government statement, “The crux of these reforms is to further ease, rationalize and simplify the process of foreign investments in the country and to put more and more FDI proposals on automatic route instead of government route where time and energy of the investors is wasted.”

Single brand retailers looking to do business in India will have an easier time now that the government has eased rules on sourcing. In the past, retailers were given five years from the time they made their initial investment to reach the local-sourcing requirement of buying 30 percent of the value of their goods from local suppliers. Now, the five-year clock won’t start ticking until the date of the brand’s first store opening.

Foreign brands with brick-and-mortar operations in the country will now also be allowed to sell products online there. Before the rule change, companies with foreign investment could only sell online if 100 percent of their products were manufactured in-house.

Investors from abroad can also now own completed buildings and other properties, which they could not in the past.

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Sourcing requirements for certain high technology segments, where necessary inputs aren’t available locally, could also soon be waived pending government review.

The full reform details have not yet been made public, but additional plans include reducing the corporate tax rate, increasing the allowable amount of FDI for certain economic sectors and increasing foreign ownership in domestic corporations.

The goal in easing the rules, the government said, is to motivate manufacturers to make in India for local consumption rather than importing from other countries.

India has seen a recent surge in foreign funds, a sign the government said points to increasing confidence in the country. From January to June, India’s FDI totaled $19.4 billion, a 30 percent jump over the same period last year.

In an article for Nasdaq, Peter Kohli CEO of global investment management firm DMS Funds said, “A point that should not be lost on the foreign investor is that, unlike China, which is having difficulty trying to transition from an export-based economy to a consumption-based economy, India is already a consumption-based economy with a vibrant middle class of over 400 million people.”