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New e-commerce FDI policy unlikely to be deferred

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New Delhi, Jan 28: The new Foreign Direct Investment (FDI) policy on e-commerce policy is scheduled to come into force on February 1.

While the online giants like Amazon and Flipkart are not happy with the move, the offline trading community has welcomed it.

Representational Image

Two news reports published on January 25 have made online giants hopeful and offline traders concerned.

The Reuters ran a story based on sources that - the United States (US) government is concerned about India's revised e-commerce regulations and has told officials in New Delhi and the policy will hinder the Indian investment plans of Amazon.com and Walmart Inc.

Last year, Walmart invested $16 billion in buying 77 percent shares of Flipkart.

The Reuters reports also said that the efforts are afoot in the US to make it a bilateral issue rather than Indian issue.

The Economic Times also published a story that said the government is considering extending the deadline of February 1. It quoted an anonymous senior official as saying that "the government is considering giving an extension, but no final decision has been taken".

Soon after the reports were published, the Confederation of All India Traders (CAIT) was up in arms. It warned that any extension/ deferment/amendment or change made in FDI policy in e- commerce at this stage will be conceived as weakness of the government, which will also have political fallout.

When the Department Industrial Policy and Promotion (DIPP) issued new guidelines of policy on Foreign Direct Investment (FDI) in e-commerce on December 26 then the CAIT had said that new guidelines will put both online and offline traders at par. But, the notification had made online giants and the US Business community a concerned lot.

[4 years of Modi govt: 100% FDI in food processing set to give impetus to 'Make in India']

Since then the US lobby has been trying hard to get some sort of relief from the government, the offline traders have been upping the pressure to ensure that the new guidelines should come into force as per schedule.

Why are new FDI guidelines issued?

There are two types of e-commerce companies: inventory based and marketplace based.

Inventory based e-commerce company is the one which owns the goods & services and sells them directly to the customers. The FDI is not allowed in an inventory based e-commerce company.

A marketplace e-commerce company is the one which does not own goods and services but acts as a mediator between seller and buyer. Companies like Amazon and Flipkart fall into this category. Hundred percent FDI is allowed in marketplace e-commerce companies.

The new guidelines were issued because marketplace e-commerce companies were acting like inventory based e-commerce companies, where no FDI is allowed.

For example, marketplace companies like Flipkart, Myntra and Amazon India, among others, were selling their own brands/in-house products at lower costs and higher margins.

The other problem is that with huge FDI at their disposal, these marketplace players were slowly killing local competition and broadening their hegemony.

The scenario was defying the Competition Commission of India vision, which says: Fair Competition for Greater Good.

What are the new e-commerce FDI policy guidelines?

1. The new e-commerce FDI rules ban companies from selling products via firms in which they have an equity interest.

This brings trouble for online giants like Amazon and Flipkart. For example, Amazon has stake in Cloudtail, which is a wholesaler that stocks goods and when an order is placed, it delivers. The small offline traders cannot compete with companies like Cloudtail, which buy in huge quantity from manufacturers at better discount rates and sell the products at cheaper rates.

2. The new guidelines also say that an e-commerce marketplace entity, like Amazon, cannot mandate any seller to sell any product exclusively on its platform only.

This will loosen the grip of marketplace giants on sellers. Once enforced, similar products will be available on many platforms.

Why deferment is unlikely?

With the upcoming General Elections, the Modi Government cannot afford to invite ire of the offline trader community, which has been badly hurt by the competition from e-commerce companies.

CAIT General Secretary Praveen Khandelwal told OneIndia that offline trader community, their families and employees constitute seven crore people.

He also said that till now the government has not invited anyone for the consultations on the marketplace giants' request for an extension.

He said that if any consultation meeting is called then the CAIT will oppose even any minor attempt to defer the enforcement of new guidelines.

It's notable that Amazon and Flipkart have written to the Department of Industrial Policy and Promotion (DIPP) seeking a delay.

But according to political analysts, the ruling BJP government has played a masterstroke by introducing these guidelines on the eve of general elections to keep the trader community, which has historically been the saffron party's core base, in its fold. This was very necessary for the BJP as the trader community had not only been giving votes but also donation to the party.

It's notable that the offline trader community was not able to cope up with the effects of the demonetisation and Goods and Services Tax (GST). Sensing the mood of the trader community, the Congress President Rahul Gandhi and other opposition parties had been trying to get the political mileage over the demonetisation and GST.

These new e-commerce guidelines will prove like a balm for the trader community as they are now at par with the e-commerce giants.

Will the consumer be affected? The answer is no as the cut throat competition will force market players to offer lucrative offers for the customers.

Will it affect India's FDI environment? The answer is again no as India is such a big market that the global businesses cannot afford to ignore.

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