'Opening up e-commerce in India against spirit of FDI in multi-brand retail'

Written by fe Bureau | New Delhi | Updated: Jan 8 2014, 18:39pm hrs
The department of industrial policy and promotion (DIPP) has said that allowing foreign direct investment (FDI) in e-commerce goes against the spirit of FDI in multi-brand retail even though it admits infrastructural development, transparency and efficient supply chain management as benefits from inflows.

The department has raised concerns on the inventory-based model of e-commerce as it competes directly with MSMEs. Indian-owned companies like Flipkart, Snapdeal and eBay have started offering open marketplace models that provide a technology platform to help MSMEs reach across the country.

There are two models of e-commerce: marketplace and inventory-based. The marketplace model works like an exchange for buyers and sellers wherein the ownership of the inventory vests with the number of enterprises that advertise their products on the website and are ultimate sellers of goods or services. On the other hand, in the inventory based model, the ownership of goods and services and marketplace vests with the same entity. FDI in the market place model is already present in the country.

Listing out eight advantages and an equal number of disadvantages of allowing FDI in the e-commerce space, DIPP floated a discussion paper on Tuesday seeking comments of various stakeholders on issues such as entry routes and caps, if it be open for all products or only for non-food products, limit for minimum capitalisation and domestic sourcing by January 30.

E-commerce in India is growing at a compounded annual growth rate of 34% and is expected to touch $13 billion by the end of 2013. Around 90% of the global e-commerce transactions are stated to be in the nature of business-to-business (B2B).

Among the advantages, the paper says that FDI will lead to better work culture and customer service, empower consumers with information and data, help in better compliance of regulatory framework and reduce costs on marketing, distribution, travel, materials and supplies. Besides, it will lead to improved customer service by providing more responsive order-taking and after-sales service to customers, along with competitive pricing.

Despite the benefits, FDI in e-commerce is feared to impair small-time trading of brick-and-mortar stores as shopkeepers are not highly qualified and unable to compete with the e-retail business format.

Because of the scale of economic operations, e-commerce players in the inventory based model will have more bargaining power than standalone traders and will resort to predatory pricing. The infrastructure created by major e-commerce players will be captive and government will not be able to achieve its objective of creating back end infrastructure, the department noted.

It also highlighted that the move will lead to monopolies in e-commerce, manufacturing, logistics and retail as Indian e-commerce market is at a nascent stage.

Allowing FDI in e-commerce will provide e-commerce players complete geographical reach, which will be against the spirit of FDI in multi-brand retail trade, which is being restricted to cities with a population of more than one million or any other city as per the choice of consenting states, the department said.

It flagged another serious issue of small-time businesses and kirana stores being the largest source of employment in the country and opening the business to consumer (B2C) e-commerce on inventory-based model is likely to seriously impact these shopkeepers, leading to large-scale unemployment.

Overall, e-commerce, including online retail, in India constitutes a small fraction of total sales, but is set to grow to a substantial amount owing to a lot of factors such as rising disposable incomes, rapid urbanisation, increasing adoption and penetration of technology such as the internet and mobiles, rising youth population as well as the increasing cost of running offline stores across the country, the DIPP said in its concluding remarks.

The paper has recommendations from various stakeholders. A national-level body of internet and mobile phone companies has highlighted the challenges as regulatory restriction to raise funds from foreign PEs/VCs while a national body of traders has strongly opposed allowing any FDI in e-commerce. They have stated that the Indian market is not yet ready for opening up the e-retail space to foreign investors.

The views of domestic e-commerce companies appear to be divided. This is on account of varying commercial considerations of entrepreneurs, i.e., opting to stay in or exiting the business, capital requirements and choosing between financial and strategic investments.