Allowing FDI in e-commerce has pros and cons: DIPP paper

Foreign direct investment in e-commerce will boost infrastructure development and spur manufacturing facility among other advantages, but it could also lead to large scale job losses, says a discussion paper by DIPP.

Listing out eight advantages of permitting foreign direct investment (FDI) in business-to-consumer segment, the Department of Industrial Policy and Promotion's (DIPP) paper said that it would also improve customer service.

It would provide "more responsive order taking and after-sales service to customers and competitive pricing; increased access to buyers/sellers, allow MSMEs and artisans to reach out to customers far beyond their immediate location, both locally within India and abroad", the paper said.

It also said the move will lead to better work culture and customer service besides reducing the need for middlemen leading to lower transaction costs, reduced overhead and reduced inventory and labour costs.

However, the paper said the development works against the spirit of FDI policy in multi-brand retail trading (MBRT). The government has last year permitted 51 per cent FDI in MBRT.

"Allowing FDI in e-commerce will provide e-commerce players complete geographical reach which will be against the spirit of FDI in MBRT i.e. being restricted to cities with a population of more than one million or any other city as per the choice of consenting states," the paper said.

It also said that Indian market is not yet ready for opening up e-retail space to foreign investors.

"It will seriously impair small time trading of brick and mortar stores. Small time shopkeepers are not highly qualified and will not be able to compete with sound e-retail business format.

"Because of scale of economic operations, e-commerce players in the inventory based model will have more bargaining power than standalone traders and will resort to predatory pricing," it said.

Small time kirana stores remain the largest source of employment in the country. Opening of B2C e-commerce on inventory based model is likely to seriously impact these shopkeepers leading to large scale unemployment, it added.

India's FDI policy restricts e-commerce companies from offering services directly to retail consumers. At present, 100 per cent FDI is allowed in business-to-business (B2B) e-commerce but not in retail trading.

The paper said the infrastructure created by major players will be captive and government will not be able to achieve its objective of creating back end infrastructure.

"Indian e-commerce market is at nascent stage of development. With FDI in e-commerce, global players will have adverse impact on this domestic industry. It will lead to monopolies in e-commerce, manufacturing, logistics and retail sector," it added.

The DIPP has sought public comments on the paper till January 30.