Home >Industry >Retail >Time is ripe to take a relook at new FDI policy on online retail

In 1999, Bill Gates said: “Information technology and business are becoming inextricably interwoven". This statement rings true today. India is marching towards becoming a digitally empowered society. Earlier, a person in Sikkim ordering a Jodhpuri jutti (footwear) and receiving it in a day’s time was a dream. With integrated and efficient supply chains creating an enhanced demand and outreach for sellers and manufacturers, this has now become a reality.

India continues to be the fifth-largest preferred retail destination in the world. Its retail sector was estimated at $672 billion in 2017 and is forecast to grow to $1.2 trillion by 2021 and $1.75 trillion by 2026. However, organized retail contributes only 9% and e-commerce, 3%, to the entire retail industry. Even with a significant expected growth of 30%, the share of e-commerce is likely to remain around 7% of the retail sector. Then why so much ado?

Technology invariably precedes regulation and will continue to outpace it. India’s experience with its e-commerce sector is an exemplary disruption in the digital business that took the market by storm. Therefore, rather than questioning the inevitable proliferation of digital methods of doing business, focus must now be on appreciating and enabling digital models that benefit the larger population and embark on ways to ensure an inclusive and empowered society that is able to reap the benefits of the digital economy. And with a growing middle class, consumer demand will drive supply and give an impetus to the entire retail sector.

While every country strives to utilize its domestic funds efficiently, there is a significant gap in the resources it needs to realise its targeted growth. This resource gap is filled by foreign participation. The e-commerce sector has been one of the largest recipients of foreign direct investment (FDI) over the last couple of years. Many Indian startups in this space grew into unicorns successfully and many continue to grow. Recent changes in the FDI policy in online retail marketplace segment came down heavily on the players on the principle of parity with multi-brand retail trading. Some of the compliance requirements would be difficult for the industry to manage, resulting in higher compliance costs, which will pinch harder on smaller players.

We can keep on debating whether the policy should be restrictive operationally or whether FDI should be permitted albeit with tangible commitment to invest in creating enabling ecosystem, viz., building logistics and strengthening supply chains, employment generation, enablement of MSMEs etc. This is typically done with mandating minimum investments and conditions relating to utilization of such investment in creation of relevant infrastructure.

Time is ripe to take a relook at the foreign investments policy on the sector as a whole on the same lines as food retail, riding high on Make in India. As long as a product is manufactured in India, FDI should be permitted. The landmark decision of allowing FDI in retail of food items made/produced in India has wiped off initial apprehensions about its adverse impact on ‘mom and pop’ stores. Then, why not extend it to other sectors? This will be a significant catalyst to success of Make in India in consumer products —moneys being invested both into demand creation and in meeting supply. This would significantly benefit MSMEs, distribution system, increase value add, substitute imports, create employment, contribute to exchequer and, above all, benefit consumers, the king! There will be no need to draft complex rules for either e-commerce or retail.

Akash Gupt is partner and leader regulatory services at PwC India.

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