Malini Bose

The Indian e-commerce industry, currently valued at about $13 billion, has witnessed tremendous growth in the last few years – a staggering 150 percent between 2009 and 2012. This growth has been spurred by the increased penetration of the internet and smartphones, a growing user base in small towns and rural areas, and the need for convenience and choice. A major driver has been the country’s young consumer base. 

The potential

As noted in a report by the Department of Industrial Policy and Promotion (DIPP), India is not ranked in A.T. Kearney’s 2012 E-Commerce Index, which ranks thirty economies on their e-commerce potential. Developing countries including China (at number 1), Brazil (at number 2) and Mexico (at number 5) make up ten of the 30 spots, but India does not feature, primarily because of its low internet penetration rate (11 percent compared to China’s 40 percent, Brazil’s 40 percent, Sri Lanka’s 15 percent and Pakistan’s 15 percent). 

Over 70 percent of all consumer e-commerce transactions in India are travel-related. Thus, there is a significant opportunity for other sectors of the e-commerce industry – including electronics, apparel, jewelry, appliances, and others – to expand their share. However, according to a report by KPMG and the Internet and Mobile Association of India (IAMAI), 70-80 percent of e-commerce companies are in dire need of funds. According to one report, 136 e-commerce start-ups folded between November 2012 and April 2013.

It is in this context that the Indian government is considering an overhaul of the regulatory framework for e-commerce. During a July 2013 meeting of the United Nations Conference on Trade and Development (UNCTAD), India expressed its desire to protect the interests of global consumers by looking into the regulation of e-commerce. 

Opening up the sector to FDI

Currently, India’s FDI policy restricts e-commerce companies from selling their goods and services to retail consumers directly, although 100 percent FDI is allowed in business-to-business e-commerce. Several companies like Flipkart, Snapdeal, Amazon and eBay provide a technology platform to retailers. Now, the government is considering allowing FDI in business-to-consumer e-commerce through an inventory-based model, in which the entity selling goods and services can also own them. 

In a discussion paper floated on January 7 of this year, the DIPP enumerated some of the benefits of opening up the e-commerce sector to FDI: economic growth and employment generation through a much-needed impetus to infrastructural development and the manufacturing sector; increased efficiency in the supply chain through lower transaction, overhead, inventory and labor costs; and improved customer service through greater responsiveness and transparency and competitive pricing.

However, plans to open up the sector have also been criticized by some stakeholders who say it might have an adverse impact on Indian entrepreneurship and MSMEs (micro, small and medium enterprises). One official told the Wall Street Journal, “It will seriously impair small time trading of brick and mortar stores. Small shopkeepers are not highly qualified and will not be able to compete with sound e-retail business.”

In its discussion paper, the DIPP lists some other potential disadvantages of FDI in the e-commerce space: that it goes against the spirit of FDI in multi-brand retail being restricted in cities with a population over one million; the possibility of predatory pricing due to the increased bargaining power of e-commerce players vis-à-vis standalone traders; captive infrastructure of major players; and the creation of monopolies in e-commerce, manufacturing, logistics and retail sectors. 

As reported in Business Today, B.C. Bhartia, the National President of the Confederation of All India Traders, believes that, “With full control over the supply chain, FDI investors will dry up the existing sources on which traders are fully dependent and exploit the situation to their benefit to earn profits.” 

Future prospects

After floating its discussion paper, the DIPP invited comments from other government departments and retailers. The deadline for recommendations was January 30. The Ministry of Commerce and Industry – DIPP’s parent Ministry – will take various stakeholder views into account before preparing a Cabinet note.

A DIPP official said that the department may “look at entry barriers and sourcing requirements for companies planning to invest in the e-commerce space” as reported in the Financial Express. At this stage, there are two key issues under deliberation – first, whether the 30 percent local sourcing requirement for foreign players (which is the existing policy for FDI in multi-brand retail) should apply to the e-commerce space as well; and second, whether services such as the selling of insurance and shares should also be opened up to FDI. The National Association of Software and Service Companies (NASSCOM), an influential software industry organization, is in favour of FDI in e-commerce in the retail space, but wants the government to make local sourcing mandatory.

According to the Economic Times, Anand Sharma, the Union Minister of Commerce and Industry said he cannot comment on the timing – “We have started a process, let it get completed.” For now, consumers and e-commerce companies will have to wait and watch.