100% FDI in e-biz to boost reforms

The decision of the Union government to allow 100% Foreign Direct Investment (FDI) in e-commerce is certainly a step forward towards reforms despite apprehensions being raised in some sections of the fast-growing online market. Contrary to initial scepticism, e-commerce has caught the imagination of a young breed of startups and new class of consumers who are ever willing to try out technology-driven platforms for shopping using the convenience of their mobile phones or other electronic devices. Even as the brick and mortar business is grappling with the demand slowdown, the online front-runners such as Flipkart, Snapdeal, Myntra and Amazon are logging in well over double digit growth in their gross sales running into thousands of crores of rupees. We all knew that the Indian startups were raising millions and billions of dollars of foreign funding through circuitous routes, but there was no policy clarity, may be more by design than default since some of the aggressive e-commerce players were causing “disruptions” in the comfort zones of the traditional way of retailing both in the organised as also unorganised sectors, important political constituents in the country.

But, as should be clear by now, some of the business models evolving out of the flat new world cannot be blocked by the governments which at best should set rules of the game. This is exactly what the government has done by setting guidelines for 100% FDI through automatic route in the online trading. This can only be a welcome move; but the problem lies with the way the policy imposes several restrictions. For one, the policy has been liberalised only for those players which follow the “marketplace” and not the inventory based model.

Cutting through the tech jargons, it would mean FDI is permitted in the e-commerce companies which provide a platform on which vendors of all hues and sizes can sit and sell their wares. Parallel to the brick and mortar would be – a owner of a big mall who rents out shops to different merchants. So, the platform provider does not own the inventory. Besides, one vendor cannot account for more than 25% of the gross sales of the platform and most importantly, the marketplace will not be able to influence pricing, meaning thereby no deep discounts, the very basis of flourishing online business. These restrictions have logically come up for criticism on the ground that it should not be left to the government to define and then oversee the business models for an area which is evolving with a lot of promise.