So, to meet the ambitious goal of becoming a trillion-dollar digital economy by 2025, India should continue to make long-term and serious foreign investors feel welcome.
By Lalit Bhasin
The e-commerce sector has shown immense potential, so the decision of the government to allow FDI in the sector in a phased manner was a welcome move. The online marketplace model, in which FDI is permitted, acts as an aggregation platform for multiple sellers, while especially benefitting small entrepreneurs, who can leverage the platform to scale up their reach and business. It also enables the participation of the next wave of consumers, beyond tier-1 and tier-2 cities, where demand has been hitherto untapped, enabling them to reap the benefits of a competitive marketplace through product variety, affordable prices and better quality.
However, the recent changes in FDI policy norms in e-commerce, as stipulated by Press Note 2 issued on December 26, add a layer of ambiguity to the operations of e-commerce marketplaces under foreign ownership—this doesn’t do justice to customers or sellers, and certainly not to foreign players who have made massive investments to further the India growth story. The provisions are clearly intended to influence marketplace operations and commercial dealings. In so doing, they cast doubt on the intent of regulation within the e-commerce space and undercut the government’s claims of ‘minimum government, maximum governance’. The move flies in the face of the much-vaunted improvement in India’s ease of doing business parameters. Policy stability is the foundation for creating a positive investment climate, and no serious host adversely changes the rules of the game for investors after substantive investments have been made.
The Press Note states that an e-commerce marketplace entity cannot mandate a seller to sell any product exclusively on its platform nor have direct equity holdings in vendors whose goods are being sold on the platform. This goes against the first principle of operations in a marketplace—that market-seller relationships are based on commercial viability for both. For smaller sellers, exclusive arrangements are often the first step to access a competitive market. The injunction against exclusive arrangements impacts both the business of small vendors the government wishes to support, and the experience of consumers, besides necessitating expensive changes in e-marketplace operating models.
By far the biggest drawback of the latest fiat is that it gives the affected companies just five weeks to implement these changes. The government has put the onus on e-commerce companies to comply with provisions that will impact sellers and their sourcing channels. Is it fair to expect them to accomplish all this in just five weeks?
Any effort to establish a policy framework in this sector should support the entry and expansion of both domestic and foreign players. A mature e-commerce model can help small producers selling on their platforms to adopt the best practices in technology, stock management and operational efficiency, and thereby build scale and attain business viability.
To add compliance hoops to jump through for foreign-owned enterprises and not domestic ones is discriminatory and undercuts organic growth. With the benefit of their expertise in large-scale e-commerce operations, global companies will substantially raise the bar in supply chain including micro and small enterprises, small retailers, agriculture and allied sectors. Thus, it stands to reason that the entry of global retail majors into the Indian market should not be stunted.
India aims to receive $100 billion in FDI in the next two years, and the landmark deals that the e-tail sector has seen recently can be a powerful catalyst for collective growth and value-addition along the entire supply chain through long-term and secure investments.
If India wishes to draw serious investors, it needs to build the country’s reputation as the right investment destination with a stable, enabling and predictable regulatory environment. The entry of big and serious players will also give a fillip to initiatives such as Make-in-India, Digital India and Skill India. So, to meet the ambitious goal of becoming a trillion-dollar digital economy by 2025, India should continue to make long-term and serious foreign investors feel welcome.