The decision, which is likely to be announced in the budget, is one of the first tangible signs of economic reform by the business-friendly government of Prime Minister Narendra Modi, who was sworn in 10 days ago.
The move is also likely to allow the government to circumvent political opposition to opening up India's $500 billion retail sector to global retail giants such as Wal-Mart Stores. Four people privy to discussions within the government told Reuters that officials believed a more robust online retail sector would spur manufacturing and consumption, helping revive an economy that has been growing at below 5 percent for two years, the longest period of sub-par expansion since the late 1980s.
"Most stakeholders support FDI (foreign direct investment)," said a senior government official, referring to e-commerce. "We have pitched for opening it up completely." Industry surveys say e-commerce could contribute as much as 4 percent to India's economy by 2020.
The official, like the people who spoke to Reuters, declined to be named as the matter was confidential. When asked about the decision, a spokesman for India's commerce and industry ministry declined to comment.
The industry ministry that drafts FDI rules recently met officials from companies including Amazon, Google, eBay, Wal-Mart and Indian e-tailer Flipkart to finalise the investment guidelines, the people said.
Global online retailers like Amazon and eBay are currently banned from selling products they have sourced themselves, and must rely on third-party suppliers.
Their platforms, which they own fully, are marketplaces for these outside suppliers. The government is likely to end this ban, paving the way for global retailers to bring their formidable supply chain, and cheaper goods, into India, potentially boosting consumption and benefiting small manufacturers and traders.
These politically influential small-scale traders have traditionally opposed any foreign direct investment into retail, fearing they would be eclipsed by larger global rivals. The BJP also opposes such investments, but the people said the government supports the online retail expansion as global e-commerce firms would still have to rely on small traders to generate business.
Opening up the online retail business for foreign direct investment is also widely expected to eliminate middlemen, leading to lower transaction, overhead, inventory and labour costs, industry officials said.
Modi, who last month won the first outright parliamentary majority in three decades in Asia's third-largest economy, wants to arrest a two-year-old economic slide by winning back domestic and foreign investor confidence.
Regulatory uncertainty under the previous government had prevented foreign supermarket chains from setting up shop in the country. So far, only Britain's Tesco PLC (TSCO.L) has announced an investment. In its election manifesto, the ruling BJP vowed to ban foreign supermarkets.
Nandita Bose & Rajesh Kumar Singh