FDI in Retail and e-Commerce

FDI Retail_0

Recent media reports about the meeting between leading e-commerce companies and officials from the Ministry of Commerce suggests that the Government of India may be considering FDI in B2C e-commerce outside the ambit of FDI in retail policy making. This may not be a step in the right direction. Here’s why:

FDI is required in an industry if the players require access to capital or technology which is not available within the country. This is not the status as far as e-commerce is concerned.

The home grown e-commerce companies like Flipkart and giants like Amazon and Ebay have large global development centers in India with thousands of engineers working on the latest e-commerce technologies. FDI is not required for this.

Capital availability for e-commerce companies seems to be infinite. The challenge seems to be if the companies can spend the funds fast enough.

The strange thing though is that the current FDI policy is quite clear – FDI in B2C e-commerce is prohibited, yet B2C e-commerce companies in India seem to face no issues at all in raising billions of dollars at increasing valuations. In other words FDI in B2C e-commerce companies is actually allowed! Then what are the discussions for?

All that seems to be required of e-commerce companies is to form two legal entities one of which handles the customers and brand and the other entity deals with logistics and supply chain. And since supply chain companies can raise FDI without restrictions as per policy, everything is hunky dory, wink wink, nudge nudge. Pray, what is being discussed?

The only restriction seems to be on preventing or allowing Amazon in India to launch their inventory led e-commerce model. Given that Amazon anyway operate a vibrant marketplace with millions of products, what are we prohibiting here except losing out on a few hundred million dollars of FDI Amazon can conditionally bring in to bolster their supply chains within the country (sometimes I wonder why can’t Amazon simply set up a new entity Nile (or better still Ganga) Logistics Pvt. Ltd. and carry whatever inventory they want in India because the dual-entity-wink-wink-nudge-nudge model seems to be perfectly acceptable).

On the other hand, let’s look at what is likely to drive e-commerce growth in India in future (tip: it is not increasing discounts on pure play online sites.)

The rapid acceptance of online shopping worldwide has forced offline retail chains to also move online and in many countries, offline chains are already among the e-commerce leaders. In India, offline retailers including large business houses like Tata, Reliance, Aditya Birla, Future and hundreds of medium sized brands are in advanced stages of launching their omni-channel initiatives. They will leverage their existing strong asset base of offline stores and warehouses and this omni-channel play (if executed well of course) will make them super competitive against pure play online retailers thus driving the next huge phase of e-commerce boom.

These business houses do not require capital but they may still prefer strategic partnership with global chains who are further down the omni-channel path and posses appropriate supply chain skills and technologies.

Unfortunately, the current FDI in retail policy with it’s single brand restrictions, conditional investment thresholds and follow up approval from state governments means large global retail chains like Walmart and others will choose to stay away for now. These global giants will enter India only when the overall FDI in retail policy is more friendly and not enter purely into B2C e-commerce.

In other words, FDI in e-commerce is a policy that will impact just one company – Amazon.

What really makes sense is for the Government to continue to treat e-commerce as a subset of overall retail and declare a FDI in retail policy that includes B2C e-commerce regulations and not separately. Whatever that policy may be.

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“Thinking Aloud” reflects the emerging trends and varied outlook of the rapidly evolving internet and communication sector. An IAMAI publication, this is a part of the market education initiative of the association.


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