Going by a report in The Times of India last week, it would appear the government is considering waiving the domestic-sourcing rule for Apple which wants to set up branded stores in the country. While the earlier rule provided for 30% local sourcing, the government amended this last year to allow for exemptions for ‘state-of-the-art’ and ‘cutting-edge technology’ players. The 30% clause was always a difficult one to fulfill—Ikea, for instance, tried hard to get an exemption on this—and made little sense. Let’s assume that Apple, or a Xiaomi and LeEco which have also applied for waivers in their single-brand retail licenses, don’t get these waivers and are not able to set up branded retail stores in India. India is still going to be importing phones—maybe even Apple, Xiaomi and LeEco ones—in large quantities to meet the voracious demand for smartphones, so there will continue to be a forex outflow, and Apple/Xiaomi/LeEco will sell through non-branded stores or distributors as they do today.
But if the government is genuinely able to ensure that manufacturing in India becomes easier, Apple/Xiaomi/LeEco will in any case find it more economical to manufacture in India—in last year’s budget, the countervailing duty imposed on smart-phones made it 11% cheaper to produce phones in the country. That is why Foxconn, the world’s largest contract manufacturer of phones including those for Apple, has pledged to invest $20 billion in manufacturing facilities in India over the next five years. Once Foxconn sets up those facilities—and it will set them up only when the manufacturing environment gets better—in any case Apple and others will be able to source locally. Indeed, as the eco-system improves enough for genuine manufacturing to take place in India as opposed to the current screw-driver assembly, and there is more value-addition in India in terms of populating the PCB core of the phone and also designing the phone, the sourcing will rise even faster.
While it is obvious that the 30% sourcing clause will be relaxed for other tech products, with nano technology being used in even textiles today, it is difficult to really distinguish between what is ‘state-of-the-art’ or ‘cutting edge technology’. In which case, it is possible that, should the foreign brand be big enough, the government may well relax the norms for others as well. Given that this will bring in both world-class technology/practices to India, apart from creating jobs, this can only be a good thing, both for Indian consumers as well as foreigners who want to invest in the country.
