MUMBAI: India's decision to remove foreign-ownership limits on part of the retail sector is likely to result in more foreign companies entering the market or expanding their presence, says rating agency Fitch. However, it feels that the pace of change is likely to be limited by requirements to source 30% of products locally.
Under the new rules, foreign companies will be allowed full ownership of stores that sell a single brand of goods; an increase from the previous 51% limit. Single-brand stores usually cater for the premium end of the market and Fitch believes that many such foreign retailers have held back from entering the Indian market or have limited their expansion plans because of worries about protecting their brands while sharing a big stake with a local partner.
The rating agency notes that full ownership would give retailers confidence that they would have complete control of their operations in India, helping encourage foreign direct investment. However, lifting their stake above 51% will trigger a requirement for retailers to acquire 30% of goods from India's small-industry sector.
It also believes that this is likely to significantly limit the pace of change as retailers will have to determine whether they can get the same value and quality of goods from local firms and will have to set up new supply chains.
The burden of this requirement would also vary greatly between retailers, as some already source many goods from India (especially garments), while other high-end and specialist retailers might find it challenging to source enough of their stock locally.
Source : economictimes.indiatimes.com