100% FDI in B2C E-Commerce: Implications for the Sector and the Consumer

The decision by the Government of India to allow 100% FDI (Foreign Direct Investment) in the B2C e-commerce sector has seen conflicting opinions emerging from various quarters. While some parties have hailed the move as a landmark development, others are sceptical and have come out in open criticism.

Retailer organisations like the Retailer Association of India and the All India Footwear Manufacturers and Retailers Association seem less than impressed by the government’s decision. The major reason for this dissatisfaction stems from the fact that retailers feel allowing access to FDI is an undue advantage that is being granted to online retail companies. Moreover, they are also worried about e-commerce players flouting the rules and selling goods and products directly to customers by leveraging the marketplace model.

As can be seen, there is a lot of confusion both within and without the industry as to what the announcement actually means and what it holds for the future of Indian e-commerce in general. Much of this confusion originates from the fact that people do not completely comprehend the impact or the scope of the decision to allow FDI into the B2C e-commerce industry. Having already witnessed a drop in the consumer footfall since the evolution of online commerce, offline retailers are worried about the impact the increased spending power of e-commerce players will have on their businesses.

Let me begin by saying that this concern is quite unfounded. The government has only approved FDI in online companies operating on a marketplace model and not in those operating in multi-brand retail. This means that while leading online players such as Flipkart, Snapdeal and Amazon are free to operate within the Indian market, the offline retailers can tap into these platforms’ consumer base to drive their own businesses and unlock hitherto unavailable efficiencies through greater outreach. Additionally, a major chunk of the B2C e-commerce conducted through online marketplaces in India was so far unregulated owing to a lack of policies that clearly defined the industry. This move to recognise the marketplace business model will result in better policy formation and structuring within the industry.

By implementing these measures, the government also seeks to address the loopholes that exist in the online marketplace model. Several online marketplaces either drove the maximum share of their business through a single seller or invested in multi-brand ventures. This gave rise to doubts of differential business policies being adopted by online marketplaces for supporting sellers in which they held a stake, a concern which was also raised by many brick-and-mortar retailer associations across the country. By setting the maximum limit of business driven through a single vendor at 25%, the Department of Industrial Policy and Promotion (DIPP) has made clear the government stance on key issues such as service liability and pricing regulation. As a result, several e-commerce marketplaces are gradually reducing the amount of business driven by some of their most prominent sellers to meet the aforementioned cap.

On the other hand, with policies and guidelines now actively defining the limits of the previously limitless e-commerce marketplaces, the end-consumer has reasons to be less enthused by the development. The government’s move to prohibit marketplaces from funding discounts means that the unregulated ‘discount wars’ that were frequently waged for consumer aggregation might finally be coming to an end. In the absence of these schemes, we might see online and offline prices achieving relative parity, a news that should encourage offline retailers but is sure to make buyers despondent.

Flipkart and Snapdeal are two of the most valuable e-commerce ventures from India, while the Indian e-commerce industry has seen an investment to the tune of $10 billion. Moreover, industry reports suggest that online commerce is set to grow and capture 11% of the retail market share by the year 2019, while physical retail is expected to shrink by four percent to 13%. Given such high stakes, the government has toed the cautious line by recognising the industry and defining policies that will support its growth in tandem with the offline market. Truth be told, the government has done a remarkable job given how little breathing space it had on the matter.

However, as with any new development, it is far too early to make a definitive statement. Eventually, only time will tell whether the new policies will make a palpable change to the market dynamics or will end up being a lot of noise about something of little import. The early signs, though, hold promise for both online marketplaces and offline retailers by enabling a framework for symbiotic growth.

Mr. Urvesh Goel, Co Founder, SyberPlace.com