Column: Triggering capital flows

Dec 02 2013, 22:07 IST
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SummaryThe ground rules for foreign investment in e-commerce and put/call options are expected soon

Two vital policy decisions are expected from the ministry of finance in the next few days. These are decisions where the Centre has already taken initial steps. And now, the critical opportunity of moving forward decisively is here.

The first of these relates to the policy around foreign investment in e-commerce. At present, FDI in B2C e-commerce is prohibited. Even as the government opened up physical retail last year, the e-commerce animal was not tackled. It was felt that this model, with its ubiquitous presence, is too complex to handle. The “safer” bet was just to let policy steer clear of it. As we, however, address this admittedly complex issue, it will be useful to consider why FDI in this sector is prohibited in the first place. The prohibition arises from the notion that FDI in any form of retail tends to disrupt the local economy and impact the livelihood of small traders. It creates an uneven playing ground, where foreign investors have access to much larger pools of capital. This rationale is precisely the reason why the physical retail policy imposes onerous obligations on foreign investors.

But e-commerce is different, for many reasons. One, the operational model is sharply distinct—consumers buy online, without touching and feeling the actual product and without having walked into a physical store.

Second, you cannot walk in, buy and walk out with what you bought—you get delivery in a few days. Globally, online retail has meaningfully developed in product areas that are only a subset of what physical retail markets offer. Data around this fact must be closely considered while evaluating whether online retail causes any disruptive impact.

Third, in India, where we are definitely not the best at building physical infrastructure, online retail meets aspirations of small-town India in the same way as mobile telephony empowered our rural society. We must not underestimate this societal empowerment.

Fourth, large-scale capital deployment always has ancillary economies growing around it. Online retail will create new opportunities and modernisation in logistics, outsourcing, supply chain, etc, will make our basic economy more competitive.

Fifth, in a sense, we are examining this issue after it became fait accompli. If we were to look around and see the capital that has fuelled our online retail giants, one would see that 95% of that money is all foreign anyway. The only difference being that the structure is such; business activities do not fall under “retail” definition. And

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