The industry is estimated to be worth about $13 billion, or approximately Rs 76,700 crore (according to a study by KPMG and the Internet and Mobile Association of India) and about 75 per cent is contributed by travel. Product retail contributes about $1.6 billion and that segment alone could be worth over $76 billion by 2021, according to Technopak. However, huge infusions of cash and of expertise are required to fully exploit this potential. The industry also needs flexibility to explore and adopt different models. The financing will have to come from overseas. But government policy does not allow FDI in business-to-consumer (B2C) e-commerce, while it allows 100 per cent FDI in business-to-business (B2B) e-commerce. The Bharatiya Janata Party's implacable opposition to FDI in multi-brand retail, reiterated by the newly sworn-in minister of state for commerce and industry, Nirmala Sitharaman, means it is not clear if this policy will change substantially.
This policy imposes a straitjacket: all operators are forced to adopt marketplace models since only those are accounted B2B. The e-commerce player just provides an online platform for buyers to interact with sellers. The pioneer of the online marketplace, eBay, has shown it is very effective in enabling unusual transactions such as the sale of second-hand mobiles, or hobby items such as stamp collections or rare books. But the marketplace model means smaller margins and less control over quality of service, product description, speed of delivery, etc. Most e-retailers dealing in high-volume, first-hand products prefer to use the standard inventory model of buy-warehouse-sell. But even Amazon has been forced to adopt a marketplace model in India to comply with FDI regulations. An inability to adopt inventory models, or to experiment with mixes of inventory and marketplace, makes it difficult for retailers to innovate and expand their range of offerings.
Indian e-commerce has some other unique characteristics. The majority of transactions, which generate well over 50 per cent of value, are carried out using the cash-on-delivery system - something that courier companies charge extra to handle. There is also reportedly an unusually high rate of return. This means high cost of collections and extended credit cycles. Faster uptake of credit cards or alternative means of secure payment through mobile phones would lead to serious improvement in margins. Given the high growth rates, and the highly competitive nature of the space, market forces should drive innovation and lead to improved quality of service. But the policy with respect to FDI has to be reviewed. If the restrictions were removed, the engine of e-commerce could move into top gear.