Gap Inc, the largest casual wear retailer in the US, looks set to enter the Indian market next year though a joint venture with Arvind Brands, two people familiar with the development said.

The San Francisco-based clothing giant has signed a letter of intent with Arvind Ltd's retail arm to form a JV in India, they said.

J Suresh, MD of Arvind Brands, and Rajiv Malik, general manager of Gap's sourcing operations in India, declined comment. An email sent to Gap's headquarters in the US to seek confirmation of the development didn't elicit any response as of late on Thursday.

Entering India may help the US company claw back some of the ground it has lost to Inditex Group, which dislodged Gap as the world's largest clothing retailer in 2008.

Arvind and Gap have Old Ties

Inditex's Zara label has succeeded in gaining ground in India, which it entered in 2010, with the brand expanding its presence across the country since then.

The development comes close on the heels of Gap's global rival Hennes & Mauritz AB getting approval from the Foreign Investment Promotion Board earlier this month for a wholly owned subsidiary in the country that will run its H&M stores.

ET had reported in January that Gap had moved company veteran Malik to India from the US to explore the possibility of opening stores in the country. Malik had told ET then that Gap was exploring various possibilities, including a fully owned subsidiary and a joint venture.

The two companies already have a longstanding relationship — the US retailer has been buying denim from Arvind Ltd for several years, said the two people cited above. Arvind Brands markets various foreign labels such as Tommy Hilfiger, Calvin Klein and Lee in the country. It's not clear what stake Gap will hold in the proposed joint venture.

In early 2012, the government relaxed rules on overseas investments in the sector and allowed foreign companies to set up fully owned singlebrand retail stores.

Gap is set to enter India at a time there is growing demand for garments sold by labels such as the ones mentioned above. That's encouraged some of them to strengthen their base in the country.

US brand Tommy Hilfiger last year changed its franchise arrangement with Arvind Brands into a 50:50 joint venture that plans to open 500 stores over the next five years. There are also reports that Arvind may look to buy the 49% stake held by Murjani Group and venture capital firm Matrix Partners in Calvin Klein's India operations.

"It is the perfect model of partnering with an Indian company as you invest with a long-term perspective," said Saloni Nangia, president of retail consultancy Technopak Advisors. "The Indian partner helps the foreign investor with the ground realities of the local market."

Top international brands are doing well despite the country's apparel retail market slipping to single-digit growth for the first time in 2012 amid an economic slowdown. Top global brands such as Zara, Marks & Spencer, Benetton and Tommy Hilfiger posted revenue growth of between 21% and 56% in the past fiscal year.

According to a 2012 report by The Boston Consulting Group, expenditure on apparel in the country is expected to increase 3.8 times to $225 billion, or about Rs 14 lakh crore, over the next seven-eight years.

Founded in 1969 in San Francisco, Gap has more than 3,000 outlets in 90 countries. The company, which owns brands including Gap, Old Navy, Banana Republic, Piperlime and Athleta, sources more than $500 million worth of products from India each year.