Allowing FDI in e-commerce has pros and cons: DIPP paper

NEW DELHI: The Department of Industrial Policy and Promotion (DIPP) on Tuesday invited comments on allowing foreign direct investment (FDI) in e-commerce, indicating the government’s intent to open up this segment.
The current policy in India does not allow foreign investment in the business of selling via online to consumers. There are no restrictions on FDI in the business-to-business segment.

In a discussion paper on ‘e-Commerce in India’, the department has sought views on eight points, including how much FDI could be allowed and on sourcing and the entry route.

Opening up of the sector will benefit existing companies who need more capital to expand their business in a rapidly growing market, which is estimated to have expanded to $12.6 billion from $3.8 billion in 2009.

Foreign players like Amazon and eBay have been lobbying the government for a pie of this potentially big market that is expected to make up about 4% of gross domestic product by 2020. The department will accept comments on the paper till January 30. It has also sought views on whether to restrict multi-brand online sales by foreign-funded companies to states which allow FDI in multi-brand retail. After the central government changed its policy to allow up to 51% FDI in the multi-brand retail segment, only 12 states have opened their doors to such investments.

UK-based Tesco recently announced its plans to set up India’s first FDI-funded multi-brand retail venture in partnership with the Tata-owned Trent. The discussion paper lists the benefits and downsides of allowing FDI in e-commerce, saying while it would benefit the consumer, small traders and businesses could be impacted.

“Allowing FDI in e-commerce will provide e-commerce players complete geographical reach which will be against the spirit of FDI in multi-brand retail trade, i.e. being restricted to cities with a population of more than one million or any other city as per the choice of consenting states,” the discussion paper said. Amazon had earlier informed the government about a delivery mechanism, where goods would be delivered in only the states on board.

The discussion paper states that FDI would boost infrastructure development and manufacturing, result in more efficient supply-chain management and reduce costs. However, it cautions that FDI in the sector may lead to multinationals dumping their cheaper products on the market causing a negative impact on the Indian manufacturing sector in general, and to micro, small and medium enterprises in particular. It added that small-time businesses or kirana stores would likely be seriously hurt, leading to large-scale unemployment.

The Confederation of Indian Industry welcomed the move. Investment in the segment will help the e-commerce business which is looking for funds and help local companies to become internationally competitive, a CII official told ET.

“Indian e-commerce entrepreneurs have been eagerly waiting for it. It was long overdue,”

Manmohan Agarwal, chief executive of online retailer , said referring to the possibility of the government easing restrictions on FDI in the sector. “However, we welcome it as good news. The move will lead to a pickup in investments in the sector,” he said.

Nasscom, the premier trade association of the information technology industry, had told the government that the move will bring down prices for consumers and therefore inflation.