DIPP to Push for Higher FDI Cap in E-Commerce

May 21, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – India’s Department of Industrial Policy and Promotion (DIPP) has announced it will soon push for a higher FDI cap in e-commerce as part of the department’s strategy to stimulate foreign investment.

At a stakeholders meeting last Thursday, the day before national election results were released, the DIPP announced its intention to push India’s new government to liberalize current FDI restrictions on investment in e-commerce.

Attended by representatives from 36 key stakeholder companies including Amazon.com, Walmart, Flipkart, eBay and Google, the meeting will be followed by a follow-up discussion early next week that will formalize the DIPP’s stance before the proposal is presented to the incoming BJP-led government.

While India permits 100 percent foreign direct investment (FDI) in business-to-business (B2B) e-commerce, FDI in business-to-consumer (B2C) e-commerce remains strictly prohibited and bound by FDI restrictions on the retail sector more generally. Because of this, many foreign e-retailers such as Amazon and eBay have established a “marketplace model,” whereby local independent merchants sell goods directly to consumers, and the platform earns commission from those merchants.

“We feel that FDI is needed in the e-commerce segment to boost manufacturing in the economy. FDI in e-commerce is required for the infusion of capital in SMEs,” a DIPP official said following the meeting.

While twelve Indian states currently permit investment in multi-brand retail by foreign companies, nation-wide FDI in multi-brand retail – and therefore e-retail – remains restricted to 51 percent.

Although the incoming BJP explicitly expressed opposition to liberalizing FDI caps in India’s retail sector, most analysts view retail FDI caps as more of a “wait-and-see” issue. Lobbying efforts in recent months by retail heavyweights Amazon.com and Walmart highlight the belief by many foreign companies that the BJP’s policy towards liberalizing FDI caps in e-retail will ultimately be flexible.

In January, the DIPP floated a discussion paper on FDI in e-commerce to solicit comments from policymakers and industry leaders on the various advantages and disadvantages of permitting 100 percent FDI in B2C e-commerce.

Key disadvantages noted by the discussion paper include global players having an “adverse impact” on India’s domestic e-commerce industry, the inability for ‘brick and mortar’ shopkeepers to compete with e-retail and the possibility that e-commerce would hinder the development of Indian-owned and led B2C e-retailers.

It also suggests, however, that permitting FDI in e-commerce could contribute as much as 4 percent GDP to India’s economy by 2020.

“We wanted to understand the challenges for e-commerce. Most stakeholders support FDI in e-commerce. The objective is to see how we push [the] manufacturing sector through e-commerce,” DIPP Secretary Amitabh Kant said.

As the BJP prepares to take the helm with a rare majority in the Lok Sabha (lower house of parliament), e-commerce stakeholders will be watching closely for signs that one of the most promising markets for e-commerce in Asia will soon be open for business to foreign investors.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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