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Investing in E-Commerce in India – the changing landscape

Indian Government’s decision to allow 100% FDI in e-commerce through automated route in 2016 was a breath of fresh air and brought relief to large number of startups in India. It was a legit move as it enabled 20,000 offline retailers to sell their products on small and large online platforms. Since then the e-commerce industry has evolved and shown persistent growth. With increasing mobile and internet penetration, m-commerce sales, advanced shipping and payment options, compelling discount schemes, e-commerce is India’s fastest growing and most dynamic channel for commercial transactions.


Market Trends:

E-commerce has made it comparatively easier for foreign brands to reach Indian customers and is among one of the fast growing trade channels available for cross-border trade of goods and services. Due to rise in income levels and increased awareness, there is growing appetite for international brands and better quality products amongst digitally connected Indian shoppers. All categories like electronics, clothing, footwear, lifestyle products, jewelry, health and wellness products, cosmetics, household goods, art and even ticket and online music are doing pretty good for online sales.

In India, e-commerce is broadly divided as domestic and cross-border, B2B and B2C, marketplace and inventory based and lastly single brand and multi brand. Technology based advancements like digital payments, hyper-local logistics, analytics-driven customer engagement and digital advertisements have helped Indian e-commerce industry to grow at a much faster rate. Initiatives by the Indian government such as Digital India, Skill India, Startup India and Make in India have also been a contributing factor in growth of this industry. A continuous increase in the internet using population in the country has given further encouragement to the e-commerce industry. However, the e-commerce segment is still in nascent stage and has immense potential to grow. Like every industry, it needs capital and quality enhancing competition. Foreign Direct Investment (FDI) is one such medium which brings both.


Foreign Direct Investment (FDI) in Indian E-commerce Industry:

  • B2B: 100% FDI is allowed in companies engaged in B2B e-commerce, example – Walmart and Alibaba can operate a cash and carry B2B business.
  • B2C Marketplace: Again 100% FDI is allowed in the online retail of multi-brand goods and services B2C under the marketplace model like Amazon, Flipkart, Snapdeal.
  • B2C Inventory Based: No FDI is permitted in inventory based model of e-commerce.
  • Single Brand: A single brand retail trading entity operating through brick and mortar stores is permitted to undertake retail trading through e-commerce subject to local sourcing requirements.
  • Food retail: 100 percent FDI is allowed for trading (including e-commerce) of food products manufactured or procured in India.
  • Multi-Brand Retail: No FDI is allowed in companies which engage in multi-brand retail trading by means of e-commerce.


Domestic E-Commerce (B2C):

The presence of international players like Amazon, eBay, Alibaba competing along with domestic operators like Snapdeal, Flipkart, TataCliq as well as the inventory led electronic retailers have made domestic e-commerce sector of India highly competitive. There are no major barriers and very few electronic retailers which has helped Indian e-commerce market to grow at fast pace for past few years.


Cross Border E-Commerce:

The United States is among the top ten countries for cross-border shopping for Indian buyers. Some of the leading categories for cross border e-commerce include automotive, health and wellness, beauty products, toys, clothing, footwear, jewelry and digital entertainment and also educational services. High shipping costs, import duties and difficulty in returns and exchanges are some of the factors which slow down the growth of cross border e-commerce.


B2B E-Commerce:

Many B2B companies have now started to develop their own platform for small business owners and traders. This move is taken to exploit the huge potential in the B2B e-commerce market in India. In view of this unused potential in B2B e-commerce market, the Indian government has allowed 100% FDI in B2B e-commerce which has resulted in global companies like Walmart and Alibaba to show interest in the Indian B2B e-commerce industry.


Online Payment and Emergence of Mobile E-commerce:

Transactions by cash have high administration costs for e-commerce companies which reduces their margins but digital solutions are evolving fast to address these complexities. Debit card usage has now increased by 86% which shows that people are getting more comfortable in using debit cards for online transactions. It is believed that this digital payment will act as game changer for the domestic e-commerce market and this heavy reliance on cash-on-delivery would be reversed in the next five to ten years. Further, Mobile E-commerce is growing effectively as a supplement to the e-commerce industry. It is expected to contribute upto 70% of their total revenues.


Current FDI Norms:

The Government of India issued a press note in December, 2018 to introduce certain changes to the FDI policy in the e-commerce sector which will be effective from February, 2019. As per the Press Note, the e-commerce entity is not to exercise ownership or control over the inventory. For this inventory of a vendor will be deemed controlled by the e-commerce entity “if more than 25% of purchases of such vendor are from marketplace entity or its group companies”. E-commerce entities cannot sell any product on its platform of any vendor in which it or its group companies has an equity stake. An e-commerce entity cannot require any seller to sell any product exclusively to their platform only. However, it doesn’t restrict the seller from willingly selling a product on just one platform. The Press Note also emphasize that services provided to vendors’ should be at arms-length and in a fair and non-discriminatory manner.

These changes have made Amazon and Flipkart to take down several sellers from their platforms and affected their revenue. However, analysts believe this is just a phase and that sector’s growth is intact. At worst, the impact is temporary. In fact, both Amazon and Flipkart are working out plans to hedge against the new rules.


Conclusion:

The e-commerce has transformed the way business is done in India. Propelled by rising smartphone penetration, the launch of 4G networks and increasing consumer wealth, the Indian e-commerce market is expected to grow to US$ 200 billion by 2026. Therefore, e-commerce industry (B2B and B2C) is among the most attractive sectors for foreign investment and there is growing appetite for international brands and better quality products. Further, India is recognized as one of the major markets globally and top market players have their eye on it.

Gautam Khurana
30 July 2019

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