FDI In E-Commerce Retail: Bane or a Boon?

In recent times, online retail or e-commerce has substantially reshaped the shopping experience of customers. The E-commerce industry in India is expected to reach the $100-billion mark by Financial year 2020, owing to increasing internet usage, discounting and investment by online retailers.

Modes of E-Commerce Transaction

E-commerce transactions could either be Business to Business (B2B) or Business to Consumer (B2C). B2B involves business between a manufacturer and a wholesaler or between a wholesaler and a retailer. B2C transactions involve only the company and the end user. These activities are further divided on the basis of business models.

First one is the Marketplace model wherein the e-commerce portal provides a platform for business transactions between buyers and sellers and earns commission from the sellers of goods/services. The enterprise is vested with the ownership of the inventory and the e-commerce platform merely works as a facilitator between the buyer and seller. The other model is the Inventory Based model, wherein the ownership of goods and services and the marketplace vests with the e-commerce portal. Here, the portal does not work as a facilitator but is engaged in e-commerce directly.

Position of E-commerce in India

The e-commerce industry in India has shown tremendous growth in last few years. Yet the industry is still in its nascent stage and is faced with a number of hurdles regarding infrastructure, governance and regulation. Factors such as low internet penetration, poor last mile connectivity are some of the issues which need to be tackled for an effective e-commerce portal in India. Under the current FDI policy, FDI, up to 100%, under the automatic route is permitted in B2B “e-commerce activities”. However, no FDI is allowed in B2C “e-commerce activities”.

The stand of CAIT

The CAIT (Confederation of All India Traders) has opposed FDI in e-commerce sector as the Indian e-commerce industry is still at a developing stage and is not completely ready for opening up e-retail space to foreign investors. The e-commerce players will have more bargaining power and higher geographical reach than stand alone traders. Small time shopkeepers are not qualified and will not be able to compete with sound e-retail business format. Further, due to scale of economic operations, e-commerce players will have more bargaining power than standalone traders and will resort to predatory pricing. Inventory based e-commerce compete directly with MSMEs and allowing the entry of inventory based large foreign e-tailers may shrink Indian entrepreneurship and the MSME sector completely. FDI in the sector will have grave consequences on the domestic industry leading to monopolies in e-commerce, manufacturing, logistics, retail sector etc. and causing large scale unemployment.

ASA insight

However, recent studies have shown the brick and mortar shops would not face any major threat due to FDI in online retailing and people are far more likely to treat online stores as their showroom – researching online and then buying in-store. While the share of online shopping in total retail has increased at a fast pace in the last few years, it is still minuscule compared to China, where the share is 8-10%. India’s internet penetration with total e-households at 46 million against China’s 207 million is one of the reasons behind India’s poor B2C sales growth. A large chunk of the business still lies in the hands of the of the neighborhood mom and pop shops. Further, these small shops have a strong presence in rural and suburban areas where there is less internet connectivity and thus the consumers would end up going to the neighborhood brick and mortar shops.

Efficiency Test and E-Commerce Retail

The strength of a particular enterprise in a relevant market can be determined by the efficiency test  under the Competition law. There are three different types of efficiencies underpinning competition law: allocative, productive and dynamic efficiency and similarly there are three different welfare standards – consumer surplus, producer surplus or total surplus important to protect the interests of consumers, or producers, or both. Depending on which welfare standard a system is seeking to pursue, the different types of efficiency can explain whether welfare is increased or not.

Allocative efficiency refers to the way in which competition serves to allocate resources to their highest and best use by creating incentives for producers to compete to expand output in a market. Productive efficiency refers to the effective use of resources by a particular firm. Productive efficiency is achieved when production is improved to produce the same level of output using fewer resources. Dynamic efficiency refers to the extent to which a company introduces new products or new processes of production.

The E-commerce setup in India has increased manifold and now more and more online shopping portals are coming up every day. E-tailers are cognisant of the fact that unless their efficiency is not increased they cannot compete with the traditional brick and mortar shops. The E-commerce industry has effectively increased its allocative, productive and dynamic efficiency to be able to compete with the local shops. India is still in a nascent stage of evolution of online retail spending as compared to China, USA, Japan and they do not really pose a threat to the local mom and pop shops. Various factors such as low internet connectivity, low last mile connectivity, failure of payment gateways are a hindrance to the e-commerce sector. As the consumers are more aware of the traditional shops and brands, they prefer going to their local shops for their daily use products. Therefore, it is quite early to decide whether FDI in e-commerce retail would seriously pose a threat to the domestic markets or not. Unless and until the Indian e-commerce retail sector overcome the external and internal challenges, the brick and mortar shops are here to stay and online retailers such as Flipkart and Snapdeal would eventually create hybrid models by tying up with these shops to set up an omni-channel platform.