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Should 100% FDI be allowed in B2C e-commerce?

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Should 100% FDI be allowed in B2C e-commerce?

The issue of FDI in e-commerce was revived once again when Minister of Industry and Commerce, Nirmala Sethuraman held a meeting with industry bodies representing both traditional retailers as well as e-retailers. The purpose of the meeting was to discuss different factors the industry faces; from taxation to FDI.

Matters got escalated this week when the Retailers Association of India (RAI), which represents retailers like the Future Group, Reliance Fresh, Shopper’s Stop, etc. filed a case demanding parity between traditional retailers and e-retailers on Monday. Following this, the Delhi High Court has directed the government to find a solution to RAI’s plea.

The topic of FDI in e-commerce is a contentious one. Though 100 per cent FDI is allowed in B2B e-commerce, what is commonly called the marketplace model, Indian laws do not allow any foreign investment in B2C e-commerce or the inventory model. This has caused a number of e-retailers to adopt the marketplace model, where the actual transaction takes place between the buyer and the seller, with the e-retailer only acting as an intermediary. However, the marketplace model is not sustainable financially for everyone, especially the smaller players.

Among domestic e-retailers, too, there is no consensus on whether the FDI cap on e-retail should be relaxed or lifted and the BJP government’s ‘Make in India’ vision is unlikely to make matters any easier. Since coming to power, creation of jobs and skill sets in the field of manufacturing has been a constant part of the government rhetoric. Allied to this thought is the idea of protecting the traditional Indian retail; a sector still largely unorganized.

“The government will not take any steps that will not favour the ‘Make in India’ initiative,” said Paresh Parekh, Tax Partner (Retail & Consumer Products) at Ernst & Young. He opined that there might be some relaxation of FDI rules regarding e-commerce. However, it seems unlikely that a 100 per cent FDI will be allowed any time in the near future. On the other hand, industry bodies like NASCCOM are clamouring for 100 percent FDI in B2C e-commerce, stating that it will further encourage small entrepreneurs and work in favour of the ‘Make in India’ project.

Perhaps the more important issue in front of the policy makers is not whether the FDI cap is relaxed but how to ensure growth of the e-commerce industry while still protecting the small, traditional industries.

As Praveen Sinha, Co-founder and MD of Jabong puts it, “New, disruptive ideas are emerging all the time and we cannot continue to lag behind the rest of the world because of a protectionist attitude. The government wants to protect the small retailer but is there a roadmap? How many years are you going to protect them? The more important thing is to encourage entrepreneurs while enabling the smaller players to make the jump.”

This would include, among other things, clarifying the GST bill, which is still open to interpretation by different states. Last week’s meeting was the first step on this path. FICCI has already been asked to submit a report on the ground realities in e-retail and what needs to change to help the sector grow further. But if the issue is merely spoken about in terms of FDI, then it will probably remain in limbo, especially since the matter of FDI in multi-channel retail also remains to be resolved.

“While allowing FDI in e-commerce will be a good move for the e-commerce sector and larger players like Flipkart, Snapdeal, the government also needs to minutely review its effects on the small scale traders and offline retailers. The e-commerce industry has great growth potential but only if it’s governed by the correct trade policies.” said Ankita Tandon-COO, Echoing comments made earlier to media by RAI representatives, she also maintained that the current government policies are different for offline and e-commerce which needs to be reviewed and bought at par by the government.

“There should be no restrictions on investment in backend infrastructure. However there should be a policy mandating that companies should offer a certain percentage of locally sourced product. FDI in retail will create an environment that motivates both investors and entrepreneurs especially for those who have made significant investments and now looking to scale up,” she said.

In fact, other e-retailers and bodies like FICCI and NASSCOM have also suggested that up to 30 per cent of products offered by any retailer should be locally sourced. This is a caveat already in place for single-brand retail, where 100 per cent FDI is allowed.


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