A DISPUTE over sourcing regulations is clouding plans by Sweden's Ikea to open 25 of its shops in India as it seeks new markets for its flat-pack furnishings.

Ikea last month asked India for permission to launch retail operations in the country, promising to invest $1,9bn over the coming years - part of a broader push into emerging markets including China and Russia. Ikea's request gave a vital boost to India's government, which hailed it as a sign that global investor confidence "is still intact" despite a sharply slowing economy, corruption scandals and stifling red tape.

But now New Delhi's insistence that the world's biggest furniture retailer source 30% of its supplies from small Indian manufacturers has become a sticking point.

India defines a small business as any firm whose plant investment does not exceed $1m. But Ikea says small firms would fast outgrow the cap after they started supplying the Swedish giant and became much bigger players.

"Small industries need to be allowed to grow and develop," Ikea spokeswoman Josefin Thorell said late last week, adding that it was important that the definition of small industry provided "flexibility".

Ikea says suppliers should continue to qualify as small businesses even after they exceed the investment ceiling. It has also asked that its compliance with the sourcing target be calculated over 10 years rather than one, saying it would be "impossible for Ikea to meet this requirement from day one".

India's media at the weekend reported government divisions over Ikea's bid for relaxation of the sourcing rules that critics say discourage overseas investment. The stipulation is part of efforts by the centre-left government to defuse populist opposition to the entry of big foreign retailers in a country where small mom-and-pop stores dominate, and to boost local industry.

India's Business Standard newspaper said the government body responsible for industrial development had agreed to tweak the rules to suit Ikea. But the Times of India said the small business ministry opposed any dilution of the regulations on the grounds it would hurt small enterprises.

Given Ikea's high profile and Prime Minister Manmohan Singh's statement on Friday that he wanted to make India a "more business-friendly place", most analysts believe a compromise will be found.

Ikea, which in 2009 scrapped plans to enter the market due to regulatory concerns, says it has a "long-term vision" for India.

"Keeping in mind Ikea's stature, I'm sure the government will work out something," said Saloni Nangia, president of retail consultancy Technopak. "Meeting the 30% sourcing target will take time - Ikea just wants some latitude."

Retail sales are seen as reaching $675bn over the next five years - with $85bn from chain stores.

Privately held Ikea says it is "eager" to open outlets in the country of 1,2-billion people but has set no target date. It made its investment announcement after India allowed foreign retailers selling one brand to own 100% of their Indian businesses, instead of 51%.

Ikea sees huge potential in India's burgeoning middle class, whose "wallet is still thin" but who want "inexpensive but nice home furnishings", CEO Mikael Ohlsson said on a scouting mission to India two years ago.