India’s new FDI guidelines for ecommerce add fresh uncertainty to the ambitious local investment plans of the likes of US powerhouses Amazon and Walmart.
The guidelines, unveiled in December and expected to come into force on February 1, state that an ecommerce marketplace entity cannot own equity in any company that sells goods and services on its platform. (One hundred per cent FDI is permitted in the ecommerce marketplace: these entities are to engage only in business-to-business and not business-to-consumer ecommerce.) Amazon, for example, sells products through its indirectly controlled companies like Cloudtail or Appario Retail on its platform.
Accordingly, inventory of a vendor would also be deemed to be controlled by an ecommerce marketplace entity if more than 25% of purchases of such a vendor are from the marketplace entity or its group companies. Amazon and Walmart would therefore have to get rid of their inventory. Furthermore, these marketplace entities are forbidden from influencing the sale prices of goods and services on their platforms.
These guidelines thus level the playing field between Amazon and Walmart-Flipkart and the hundreds of small sellers and private labels who also want access to the marketplace dominated by these bigger players. They also create balance with traditional bricks-and-mortar retailers who have suffered as a result of the deep discounts offered to consumers by online entities. Some had complained to the government that the dominant marketplace players were violating FDI policy by influencing prices and operating an inventory-based model through the back door.
Amazon, for its part, has sought an extension of the deadline as these new changes require changing its business model and an overhaul of inventory. Although the government is reportedly considering extending the deadline by another two months, the domestic retailers are pressuring them not to do so. What is staying the government’s hand is the forthcoming national elections. The ruling Bharatiya Janata Party’s instinct is to keep faith with its support base among the trading community. For such reasons, the government kept Walmart from multi-brand retail for four years, forcing the company to enter the ecommerce space, although the rules do permit 51% FDI in multi-brand retail.
N Chandra Mohan is an economic and business commentator based in New Delhi.