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FDI in e-commerce will help domestic small retailers

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[dropcap]T[/dropcap]he Department of Industrial Policy and Promotion (DIPP) has reportedly recommended foreign direct investment in the marketplace format of business. But the Confederation of All India Traders (CAIT) opposed the move. The CAIT argument is that the move will allow e-commerce retailers to procure cheaper products from abroad and sell those in India. How justified is the concern of CAIT? In other words, does the DIPP view on permitting FDI in the sector make sense?

For an answer, one must take a look at the marketplace model first. This model is an aberration from a normal business process. It evolved due to the restriction on FDI in ventures in India. The point to note is that the objection of CAIT pertains to a mere 6% of the transactions taking place in India’s e-commerce segment. Here the e-commerce market is dominated by the online travel segment, which comprises 70% of all the deals. And a mere 6% of deals forms part of the e-retail, or the segment that affects brick and mortar retailers.

Since India does not allow FDI in e-retail to circumvent the rules, companies like Amazon and Flipkart operate through marketplace platforms which connect small retailers with the buyers. Under this model, Amazon, Flipkart and other such companies keep on paper ‘arm’s length distance’ with their sellers. In other words, Amazon, Flipkart etc, because of foreign investment in their books, cannot control business practices of their sellers.

Marketplaces are websites that connect buyers to sellers, offering services such as warehousing, logistics and payments. Since the model came to take advantage of the grey areas of legislation, there is no definition of an online marketplace under current FDI laws. Therefore, in a recent affidavit before the Delhi High Court, the government refused to define the term marketplace.

A real-life example will help understand the marketplace model. Since FDI in is not allowed in India, Amazon and Catamaran (an Indian, family-owned fund of Infosys co-founder Narayana Murthy) have formed an entity called Cloudtail India Pvt Ltd. It is fully-owned by Prione Business Services Pvt Ltd. Prione, in turn, is owned 51% by Catamaran. Amazon Asia Pacific Resources Pvt Ltd owns 48% and Amazon Eurasia Holdings the remaining 1% stake in Prione, owner of Cloudtail. Since Catamaran, an Indian-owned company, holds a majority (51%) stake, Prione is considered an Indian entity and can roll out the e-commerce business. Amazon model is a representative one, used by other large e-retailers in India.

The growing Indian market, despite some grey areas in rules governing investment, has been attracting foreign capital in the sector. In 2015 alone, the total venture capital and PE investment in the sector was more than $15.6 billion. Once the rules are formally attuned to the expectations of investors as well as consumers, many will invest in manufacturing and the ‘Make in India’ campaign will receive a boost. When the market is big and expanding, brands will opt for producing there. The Indian experience in the automobile sector is a case in point.

New-age Indians have unleashed a retail boom. From the current estimated $550 billion, the market is projected to touch $1.2 trillion by 2020 and $2.1 trillion by 2025. This will generate 10-12 million jobs in the next 10 years. Despite the growth in retail, unorganised retail is expected to maintain its stranglehold over the retail market, cornering at least 80% market share. Clearly, the size of the market ensures survival of all formats.

The brick and mortar retailers complain against e-retail and even have filed cases against the sector. But this is not a zero sum game. The growth of e-retail has not come at the expense of brick and mortar retail. Overall, the consumer market is expanding due to rising income, demographic profile and expansion of communication network resulting in knowledge dispersion. E-retail is faster in garnering an incremental share of the expanding market.

No less important is the fact that e-retail has provided an opportunity to small and medium manufacturers across the country to access target market cheaply. This has provided increasing business and employment opportunity to people, resulting in increased dispersion of income. The socio-economic benefits arising out of cannot be winked at.

The other major benefit of has been the growth of logistics in the country. Companies have been investing heavily into developing logistics support to even tier-II, Tier-III and other smaller centres. The logistics sector itself is estimated to grow at 12% CAGR in the next five years. The incremental benefit in terms of bringing in modern services and merchandise for increasing number of people and also employment generation far outweighs the concerns of status quo seeking retail associations.

has benefitted from the surging boom. The department’s revenue during the first nine months of the fiscal year 2015-16 doubled to Rs 1000 crore from Rs 500 crore last year on the back of cash on delivery to tier-II and smaller towns. While e-commerce companies gained from the last mile connectivity offered by India Post, the postal department could garner much-needed revenue from the boom. It ended up as a win-win situation for the Indian economy.

When a substantial investment has already come and employment has been generated, it is inadvisable and even difficult to turn the clock back. There are precedents in the banking sector where banks like ICICI and HDFC surpassed the foreign investment limit and the government opted for status quo ante in order not to destabilise the system. Even in the case of mobile telephony, a similar approach was taken. There is no harm if the government adopts the same stance and regularises sector in view of its employment generation and income dispersion effect.

A survey of small traders across product categories and spread over geographies reveal that traders prefer for accessing larger market at less distribution cost. The negative effect of e-commerce on small traders is more a myth than a reality. Clearly, CAIT is not painting the true picture and working against the long term interest of its member traders.

A survey of the FMCG sector has revealed that 90% of online buyers of FMCG products are aged 35 years or less. E-commerce is the preferred mode for the younger generation that is the locomotive for growth in the country. Public opinion is overwhelmingly in favour of use of technology in daily purchase options. Should the country pay heed to this voice or listen to some entrenched group opposing modernity?

A large number of domestic entrepreneurs accessed foreign portfolio investment to expand their business. Restriction on FDI in e-commerce is stunting the further growth of such domestic enterprise. The policy in effect is preventing domestic companies to take a leading position as Alibaba did in China.

Evidently, India has a lot to gain from easing the rules governing E-commerce. Gains will be in terms of better logistics, higher consumer satisfaction, increased FDI, broad basing of market, increased employment and higher dispersion of income for people living in smaller towns. Finally, a transparent framework will not only lead to faster growth but also help the exchequer to raise higher revenue. A myopic approach on the other hand will throttle growth opportunities.

Disclaimer: The CAIT is a traders' lobby; its views are to be seen in that light.

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Sugato Hazra
Sugato Hazra
Public policy analyst based in Delhi

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