The Curious Case of Amazon, Flipkart & FDI - The Impact of New FDI Rules

Rapid FDI stride is something India is boasting of since economic liberation in 1991, And indeed it brought in huge investments and millions of jobs alongside. No doubt market reforms placed the economy on the fast track of development. But on the flip side, soon after FDI in multi-brand retail got introduced in 2012 local businesses and trades took a hit quite as expected. Especially since gigantic foreign players like Amazon entered the market, Plenty of jobs were lost while micro & small retailers suffered significant losses.

First Significant Change in FDI Policy That Hit Amazon/Flipkart
Present Scenario and Government's Role
E-commerce/E-retail Growth in India
Why E-commerce Regulation is Vital for Indian Economy
Fresh Allegations Amidst Sensational Revelations
What lies Ahead for Amazon & Flipkart
FAQ

First Significant Change in FDI Policy That Hit Amazon/Flipkart

The ease & comfort of e-shopping has been intelligently multiplied in value by these global giants by offering heavy discounts. Therefore, to level out the playing field, Govt of India brought in a major policy shift Via FDI into e-commerce in Dec 2018. This change was persuaded by Indian brick-and-mortar retailers who were long unhappy with the supposed unfair trade practices of these multinational corporations.

They contested that e-commerce retailers like Amazon & Walmart controlled Flipkart were creating complex business structures to smartly bypass foreign investment rules. They do it by finding a way around FDI rules to avoid complying with orders that are detrimental to these corporation's interests & profits.

US companies deny these charges, But govt of India had to look over the interests of Indian businesses first & so it did. Now, these giants were disallowed to sell products from sellers in whom they had an equity stake.

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Present Scenario and Government's Role

However, this didn’t seem to deter these foreign participants from working around policies to keep competition from Indian retailers at bay. So the Govt of India again is revisiting the FDI rules off late to tweak it further and Prohibit even those sellers from selling on these platforms, in whom these e-commerce companies have indirect stake through their parent company.

Prohibit sellers who purchase from the e-retailer or its group firm & intern sell on the e-commerce site (presently the seller is allowed to transact 25% of its inventory under this arrangement)

Govt had earlier in 2020 tightened the noose on FDI from neighboring countries as well, who share land borders with us like China, who now will have to seek govt approval before investing. The objective behind was to protect opportunistic take-overs & acquisitions of Indian companies in distress by foreign giants, due to COVID-19 induced global recession.

Henceforth, any new investments in any sector from these (restricted) countries namely China, Pakistan, Bangladesh, Nepal, Myanmar, Bhutan and Afghanistan will have to take the govt route, and not the automatic route which was open to it earlier.

E-commerce/E-retail Growth in India

Let us look at some fascinating facts & figures before we discuss this subject further:

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Why E-commerce Regulation is Vital for Indian Economy

According to an American market research firm, Amazon & Flipkart together occupy about 63% of the total e-commerce space in India. Now, if domestic retailers, online & offline i.e. physical brick-and-mortar stores have to have a fair share of the market or a fair competition at least govt has to devise a strategy to promote Indian e-commerce & Industry without discouraging FDI. It’s a tough proposition.

FDI is looked over by Indian departments of commerce & industry. They formulate laws and regulate FDI inflow by framing new policies and/or modifying scrapping old policies & rules. While this is done to further the economy on a macro level, its ripple effect on the micro economy can’t be overlooked either.

So it has to strike a fine balance between retail reforms, an open market which on one hand benefits end consumers and provides millions of jobs. On the other hand predatory pricing, deep discounting by online retailers makes small retailers(mainly owner-managed & run stores) fight for survival tougher.

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Fresh Allegations Amidst Sensational Revelations

A large growing economy like India, where low production costs and high-quality labor service lures investors from the world over, developed nations like the US, European and China, is also most prone to manipulations by foreign players if given a free run. As feared in this tweet by CAIT, Amazon India has been disrespecting laws reveals a recent Reuters investigation.

In January 2020, India’s antitrust watchdog, the Competition Commission of India, announced it was investigating Amazon and Walmart Inc’s Flipkart following a complaint by an Indian trader group. The commission cited four alleged anti-competitive practices: exclusive launch of mobile phones by the e-commerce firms, promoting preferred sellers on their websites, deep discounting, and prioritizing some seller listings over others.

What lies Ahead for Amazon & Flipkart

While the colossal change in consumer behavior is unlikely to fade in near future, Amazon & Flipkart also maintain that they have been complying with Indian laws duly & are denying all charges. Govt is in talks with stakeholders for over a month. Therefore, for now, it is difficult to say what impact the policy changes, if any, will bring in, though e-retail unquestionably seems to have a bright future in the Indian market of a billion-plus.

FAQ

How much FDI is allowed in retail?

51% FDI in multi-brand retail through automatic route i.e. without having to seek govt approval.

Do online marketplaces like Amazon have their own products?

Amazon and other multi-brand retail marketplaces are only allowed to connect sellers & buyers on their website in India. They are not allowed to purchase, hold, market and sell stocks as their own.

Who started e-commerce in India?

K Vaitheeswaran was the first person who opened the first online marketplace for Indian consumers called Fabmart.com in India in 1999, now rebranded as ‘More’.