Centre plans to allow 100% FDI in e-commerce, with Make in India rider

NITI Aayog officials say the plan is to take a multi-pronged approach to help various sectors via e-commerce and promote manufacturing in a liberalised FDI regime

Pure play e-commerce, which implies sale of products by an online retailer directly to consumers, would be permitted to have up to 100% foreign direct investment (FDI), if a latest proposal of Niti Aayog is accepted by the Union government. But a rider, that products sold through e-commerce must be manufactured in India to gain from the liberalised regime, could play a spoilsport, pointed out analysts. The idea behind such a condition is promoting ‘Make In India’, a signature campaign of the Narendra Modi government.    

At present, FDI is not allowed in e-commerce, but there’s no bar on foreign investment in the online marketplace format. The restriction forced American major Amazon to tweak its inventory-led global business model and operate a marketplace platform instead in India. Even home-grown Flipkart, funded by marquee foreign investors, switched from inventory model to marketplace format to comply with the policy guidelines.   

 

In case FDI in e-commerce is permitted, as visualised by Niti Aayog and discussed amongst top government officials, the likes of Amazon and Flipkart may be encouraged to shift back to their original inventory model, but the India manufacturing rider may just hold them back, industry stakeholders pointed out. In fact, they cited the mandatory 30% local sourcing in the retail policy (both multi-brand and single- brand) as a hurdle for several international brands starting from Walmart to Ikea to Apple. They added that the rider on India manufacturing in the e-commerce policy may be seen as an extension of mandatory local sourcing.                                

In March, the government allowed 100% FDI in online retail of goods and services under the “marketplace model” via automatic route, in a step to give a stamp of approval to existing e-commerce companies operating in the country. 

Under the marketplace model, an e-commerce company does not hold any inventory of its own and sells products sourced from multiple third parties.

Sources in NITI Aayog said that the plan is to take a multi-pronged approach to help various different sectors via e-commerce and promote manufacturing in a liberalised FDI regime. “FDI in B2C would help in increased retail sector growth of India made goods, which would further help small and medium enterprises and cottage industry,” said a NITI Aayog official.

The new norms, if rolled out, would also help improve infrastructure development including logistics, to meet the demand of underserved areas. The revised policy is also targeting to create around 10 million additional jobs by 2020. 

However, experts said that the move might just end up benefiting a few companies and sectors as they may not be ready to sell only ‘Made in India’ products in electronics and other highly specialised segment.

“This could help vertical players in categories like furniture, food and groceries, apparel, lingerie, baby care among other things, where they could source the products fully from India. Horizontal market places may not benefit much from such a move since the largest category of mobiles, electronics and accessories may not be manufactured in India,” said Sreedhar Prasad, partner ecommerce and startups, KPMG India.

The government allowed 100% FDI in marketing of food products produced and manufactured in India a few months ago. There’s no taker yet for that channel.