Allow More than 50% FDI in India’s Direct Retail E-commerce

By Kelli K. Clark —

Source: Prachatai’s flickr photostream, used under a creative commons license.

Status: Not Started Foreign Direct Investment (FDI) in direct business-to-consumer retail e-commerce is currently not allowed unless items are all being sold under a single brand, or inventory is not owned or controlled by the foreign company.

High Difficulty: Press Note with Political and Commercial Opposition To make this change, the government must issue a press note allowing more than 50 percent FDI in e-commerce and remove all restrictions on direct, inventory retail e-commerce companies. This move will be opposed by the Confederation of All India Traders (CAIT) and those who fear e-commerce FDI will harm micro, small, and medium enterprises (MSMEs), the brick-and-mortar domestic industry, political leaders connected to the merchant industry, and India’s large conglomerates moving into e-commerce.

This is the eighteenth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.

E-commerce is an emerging part of India’s economy. Increase in internet penetration is expected to allow e-commerce in India to reach $125 billion by financial year 2020. FDI plays large role in India’s e-commerce market; Amazon and Flipkart together account for 75-80 percent of online retail business in India leveraging a “marketplace” model where they connect buyers and sellers.

Although 100 percent FDI is automatically allowed in marketplace models of e-commerce, no FDI is permitted in the inventory-based model for foreign firms that sell multiple brands. The inventory model includes any e-commerce activity in which “inventory of goods and services is owned by e-commerce entity and sold to the consumers directly.” Marketplace models, on the other hand, serve as a facilitator between buyers and sellers. This distinction was made clear in last year’s Press Note No. 2 (2018 Series).

This press note clarified and tightened the FDI allowances for e-commerce. It stated that no vendor can supply over a quarter of products sold on a platform, and that online marketplaces with can no longer enter exclusive deals for selling products. The press note also prohibited marketplace e-commerce from directly or indirectly influencing the prices of goods or services, in an attempt to “level the playing field.”

When this press note came into effect February of 2019, Amazon and Flipkart lost a combined $50 billion in market capital. These major companies have been accused by opponents such as CAIT of FDI policy violation and predatory pricing which harms domestic brick-and-mortar industry. This treatment of e-commerce giants, as well as India’s policy lean towards data localization, has been troubling to foreign investors.

The Department for Promotion of Industry and Internal Trade (DPIIT) secretary Guruprasad Mohapatra has announced that a new national e-commerce policy will be released by the end of this fiscal year, alongside the long anticipated new industrial policy. Secretary Mohapatra has been clear that industry should not expect this policy to bring changes in the existing FDI rules. Instead, in a move towards further regulations, DPIIT has been examining the possibility for setting up a regulatory authority for the e-commerce sector.

Opposition to opening e-commerce to direct retail FDI is causing India to miss an opportunity for growth and job creation. This is a stark break from Prime Minister Narendra Modi’s 2014 speech while inaugurating CAIT’s two day convention. In that speech he called for a revamp of the entire government mechanism and called upon traders to not fear globalization but consider it an opportunity. On this topic, Prime Minister Modi went so far as to tell the traders they should demand that the government provide avenues to increase their “capacity to meet this new global challenge rather than telling the government, ‘shut down online trade’.”

If the Modi government returned to this bold stance, and issued a press note to allow more than 50 percent in direct retail e-commerce, new opportunities for growth would open at last. Rather than fighting against the tide of e-commerce, new avenues for e-commerce to support of the MSMEs could be explored. If this bold, but simple, move was taken, the government’s new e-commerce policy could focus on equipping traders to engage these global markets, rather than shutting down FDI and limiting growth.

Ms. Kelli K. Clark is a program assistant with the United States Institute of Peace and a former research intern with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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