Swedish retailer IKEA , the world's largest furniture maker, will set up shop in India after earlier balking at sourcing requirements, spending €1.5-billion ($1.9-billion U.S.) to open 25 stores in Asia's third-largest economy.
IKEA's plans, announced by the Indian government after a meeting between the company's CEO and India's trade minister in Russia, could give a boost to the embattled government of Prime Minister Manmohan Singh, which was forced in December to backtrack on plans to allow in foreign supermarket operators.
While the government removed foreign investment caps in single-brand retail in January, it imposed a condition that foreign retailers source 30 per cent from local small and mid-sized enterprises, dampening the enthusiasm of retailers for the plan.
"The mandatory sourcing clause that requires goods to be sourced from small and medium enterprises will remain a challenge," IKEA spokeswoman Malin Pettersson Beckeman told Reuters by phone on Friday.
India said the company had discussed its reservations over the sourcing policy with the government.
"IKEA had certain reservations about sourcing norms which were discussed with the DIPP (Department of Industrial Policy and Promotion) officials; suitable answers of which were provided leading to the decision to invest," the Indian government said in a statement.
The company does not yet have any stores in India but sourced $450-million (U.S.) worth of goods from the country last year, a figure it aims to lift to $1-billion in coming years.
The Singh government is keen to bring global supermarket chains such as Wal-Mart Stores Inc and Carrefour SA into India, in hope of improving the efficiency of supply chains in a country where roughly one-third of fresh produce rots before it gets to market.
However, foreign direct investment in supermarkets has been opposed by owners of one-off shops, which account for roughly 90 per cent of India's $450-billion retail sector, as well as by members of the ruling coalition.
IKEA said its investment will be made over 15 to 20 years.
India's commerce ministry said IKEA will initially invest €600-million and a further sum of up to €900-million.