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Govt. Allays SME Fear

The cabinet move to allow 51% FDI in multi-brand retail has come with several riders. Among them is that foreign retailers setting up shop in India will source 30% of their products ‘preferably’ from small-scale industries.

The word, ‘preferably’, was a late insertion, thus diluting the condition a bit, but SMEs still have plenty to cheer. The government has clarified that once the SME grows in size, it won't lose the comparative advantage in selling products to retail ventures involving FDI.

For the purpose of this policy, small industries are defined as units with investments in plant and machinery not exceeding $250,000. “The volume and value of the SMEs will increase over time and they will grow alongside the foreign players. The SMEs who supply (to foreign retail giants under the special dispensation) initially will continue to do so despite their growth (and eventually losing the small industry tag),” said a ministry official. Earlier, the government had defined small industries as those that have a total investment in plant and machinery not exceeding $1 million at the time of installation, without providing for depreciation.

“Further, if at any point in time, this valuation is exceeded, the industry shall not qualify as a small industry for this purpose,” the commerce and industry ministry had said in January this year.

However, as per the amended conditions for FDI in single-brand retail, even if the small industries’ investment goes beyond $1 million, they will continue to supply to the foreign brands. This means that the entry level sourcing partners of companies like Ikea and Pavers- who have expressed interest in FDI- will continue to supply to them all through

“In respect of proposals involving FDI beyond 51%, sourcing of 30%, of the value of goods purchased, will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors, where it is feasible,” the cabinet committee on economic affairs said on Friday. Besides, the quantum of domestic sourcing will be self-certified by the company and, subsequently, checked by statutory auditors and the sourcing requirement would be ascertained by company incorporated in India which is the recipient of FDI.

Financial Express, New Delhi, 17-09-2012

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