On Monday (6/20) Indian Prime Minister Narendra Modi announced that “India is now the most open economy in the world in FDI (foreign direct investment).” This new regulation will increase the permitted FDI percentage (to varying extents) in sectors such as broadcasting, pharmaceuticals, defense, civil aviation, and single brand retail. This radical reform will place a major focus on job creation, employment, and infrastructure improvements in India. In addition, it will allow for the long-awaited arrival of Apple stores in the world’s fastest growing smartphone market. A foothold has been secured in Indian eCommerce with the adoption of 100% FDI approved for B2B food retailing.
Key reform decisions were taken at a high level meeting chaired by the PM, which makes India the most open economy in the world for FDI.
- PMO India (@PMOIndia) June 20, 2016
In the 2013-14 financial year, India saw an influx of US$36.04 billion as a result of FDI. After reform measures taken by the government, this number was increased to US$55.46 billion in the 2015-16 financial year. This inflow is only expected to increase as a result of the latest FDI reforms.
Several sectors, such as aviation, are now enabled for automatic FDI approval. More sensitive sectors such as defense capped at 49 percent FDI, this can now increase further with government approval. PM Modi also announced this regulation will allow for 100% FDI in relation to eCommerce… only in respect to food.
It has now been decided to permit 100% FDI under government approval route for trading, including through e-commerce (1/2)
- PMO India (@PMOIndia) June 20, 2016
…in respect of food products manufactured or produced in India. (2/2) #TransformingIndia
- PMO India (@PMOIndia) June 20, 2016
As for food-related eCommerce, 100 percent FDI is allowed in the business-to-business (B2B) segment. Unfortunately, this continues to be restricted in business-to-consumer (B2C) eCommerce.
Single vs. Multi-Brand Retail
The phrasing of these relaxed regulations allows for the 100 percent FDI entrance of single brand retailers. This will likely include brands such as Apple, Ikea, Victoria’s Secret, and other top retailers. Many of these brands have been eager to be introduced to the rapidly growing consumer market.
These new businesses will gain access to the Indian consumer market. This regulation simultaneously requires manufacturing to be completed in India. As such the foreign businesses are prevented from establishing an Indian presence solely for the profits of trading activities. As phrased by Arun S of The Hindu, “by giving them [foreign single-brand retailers] only a three-year blanket exemption from the 30 percent local sourcing norm over and above the five years where the 30 per cent procurement requirement would have to be met as an average of five years’ total value of the goods purchased. This is to ensure that they manufacture in India rather than making profits through just trading activities.”
These regulations discourage multi-brand retailers, such as the hypermarket chain Walmart, due to the 51 percent FDI restrictions still in place. This protects the millions of small retailers in India who are represented by the small trader’s lobby, which constitutes a large voter bank.
The ‘Marketplace’ Loophole
Another major change, which came as a result of these reformed regulations, is the closure of the ‘marketplace’ model, which abused a major loophole in previously established eCommerce FDI regulations. Through this loophole Amazon, as well as local multi-brand eCommerce retailers Flipkart and Snapdeal, claimed to act only as platforms for buyers and sellers to complete transactions, henceforth permitting their activity in India. Recently the government department for industrial policy has rejected this ‘marketplace’ model. The above-mentioned retailers now must avoid any and all activity outside that of a platform for transactions, including offering discounts or other incentives that may only be established by the local seller.
This is a significant alteration to India’s placement in the international economy. It is also a sign of the significant internal growth of India’s economy. While it is just a small step forward for eCommerce in India, the opening up of multi-brand retail in food has opened the door for future eCommerce related advancements in the (hopefully near) future. The 1Digital Genius eCommerce staff will continue to keep you updated on the latest eCommerce news and current events. Until then, happy shopping!