Column: Indian e-tailers need FDI

Jan 22 2014, 05:07 IST
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SummaryOnline retail can boost incremental consumption, instead of being just an alternate channel for offline purchases

The Department of Industrial Policy and Promotion (DIPP) recently released a discussion paper on e-commerce, seeking comments from all stakeholders (e-commerce players, retailers, traders) on allowing FDI in B2C e-commerce activities. This has given rise to a number of voices among stakeholders, both in favour of and against this regulation.

The Union government has so far restricted foreign companies from selling their products in India through the online medium. Few global e-commerce players have been lobbying with the Indian government, in order to capture a slice of this growing pie.

In this context, it is imperative to examine how the Indian e-commerce market has shaped up so far, the issues faced by practitioners and what the new regulation implies for various stakeholders.

The Indian e-commerce market grew at a CAGR of about 35% between 2009 and 2012 to $9.5 billion. The market was estimated to reach $12.6 billion in 2013 and is poised for further growth, given the ever-increasing internet user base, change in urban lifestyle focusing on greater convenience and increasing access to a wide product assortment.

One of the reasons for the rapid growth witnessed in the Indian e-commerce space has been the huge infusion of capital from venture capitalists (VCs). There was a spurt in VC investments during 2011 and 2012. Indian online retailers are yet to turn profit-making but hope to turn the tide as they achieve scale.

However, of late, Indian e-commerce players have faced challenges in raising funds for expansion, due to regulatory restrictions. Specifically, e-commerce companies have faced issues in raising follow-on investments. More than 70% of the funds raised by Indian e-commerce companies have been concentrated among few of the category leaders. More than 136 e-commerce start-ups were reported to have shut operations between November 2012 and April 2013.

Besides funding issues, Indian online retailers have also faced infrastructure bottlenecks, which are affecting product delivery and customer satisfaction.

Stakeholders opinion on the governments decision to allow FDI in B2C e-commerce retail has been mixed. Some of the e-commerce companies have been in favour of foreign investments in financial form, but not of strategic nature. Another body of traders have opposed FDI, as they believe that FDI could monopolise manufacturing, logistics and retail sector and lead to large-scale unemployment.

Few stakeholders believe that the entry of global players will impact domestic players, who are still in a nascent stage.

One of the arguments against

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