A comprehensive e-com policy needed to boost FDI in India

Multiple changes made in India’s ecommerce FDI norms to promote domestic retailers in the past few years are causing roadblocks to global ecommerce companies like Jeff Bezos-owned Amazon and Walmart-owned Flipkart India’s ecommerce players are compelled to mention the ‘country of origin’ on every product sold across their marketplaces. The government also plans to tighten FDI rules besides banning a seller with a foreign stakeholder. If formalized, these changes will hurt Amazon India the most as it holds indirect stakes in two of its biggest online sellers in India, Appario and Cloudtail. The government also plans to levy a 2 per cent equalization levy or digital services tax on these products.

The rise of Joe Biden led Democratic government in the US has given American ecommerce companies much needed boost to survive the business challenges in India. Both Amazon and Flipkart are getting sufficient support from the current US government. As per government’s Congressional Research Service (CSR) report, the new FDI norms on raising foreign equity caps for insurance and defence and other strides will help India attract foreign investments.

New amendments in FDI rules

However, despite these changes, ease of doing business seems to be far from reality in India. Since 2016, the Indian government has been tightening FDI policies for these e-commerce marketplaces. The latest amendment, known as Press Note 2 (2018), allows 100 per cent FDI in in India’s marketplace model under certain conditions. This entails Press Note 2, ecommerce companies operating marketplaces in India cannot own any of the inventory sold on their marketplace. Also they cannot influence the sale of goods directly or indirectly. Another rule these companies have to abide by is not to hold an equity share in a vendor’s firm that intends to sell on the said e-commerce entity.

No impact of trade relations with other nations

Abhishek Rastogi, Partner, Khaitan & Co is confident India’s investment-related decisions regarding marketplace model will not impact its trade relations with other countries as India has the right to take such calls. He reveals the Indian government plans to simplify FDI norms and direct the management of indirect stakes of these global companies in Indian subsidiaries. The government has initiated a draft ecommerce policy that mandates the approval of nodal ministry whenever changes in ecommerce regulations are made. The policy also aims to invite and encourage foreign investment in ‘marketplace’ model alone. It debars an e-commerce platform with a foreign stakeholder from owning or controlling the inventory on its platform.

Importance of the India-US partnership

The Indian e-commerce space is currently engaged in a swadeshi versus videshi battle. Comparing Amazon to the East India Company, lobby groups are promoting Mukesh Ambani’s Reliance Industries and its subsidiaries under the swadeshi label. On its part, the government plans to promote MSMEs by making certain changes in FDI regulations.

However, despite this, India cannot ignore the Biden government as it needs to acquire a greater access to American products across farming, medical devices and agricultural implements. It also requires a reduction in import duties on some information and communication technology products. In turn, it seeks to resume export benefits to certain domestic products under the GSP, exemption from high duties imposed by the US on steel and aluminium products. It also plans to provide greater access to its products across the agriculture, automobile and automobile components and engineering sectors.

According to Jayant Dasgupta, Former Indian ambassador, WTO, India’s goods and services trade with the US totaled $146 billion in 2019. Exports to the US was $58.6 billion and imports was $87.4 billion. Its FDI in India (stock) increased 8.2 per cent to $45.9 billion in CY2019.

US focus to help India counter China threat

For quite some time now, India has been planning to reduce its trade dependency on China. Last year, it monitored all popular Chinese digital platforms operating in China as well as FDI inflows from Chinese investors. In such circumstances, it needs to support the US by offering trade concessions under the MFN (Most Favored Nation) clause, which also extends to China and many other nations under the WTO guidelines, adds Dasgupta.

India’s future stand on FDI for ecommerce marketplaces depends on its relations with the Biden government. Though the country is free to protect its domestic sellers, the current market size of Amazon and Flipkart requires it to introduce a comprehensive ecommerce policy that has little scope for sporadic changes.