India s Retail Policy: Securing a Balance between the Physical Store and E-commerce. Dr. Mohua Banerjee, Ms. Rajashri Chatterjee IMI Kolkata, India

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1 India s Retail Policy: Securing a Balance between the Physical Store and E-commerce Dr. Mohua Banerjee, Ms. Rajashri Chatterjee IMI Kolkata, India

2 Introduction Indian retail sector has been in a state of accelerated growth since the late nineties. Modern retail is still at 8-10% of total retail trade and traditional retail (kirana stores, wet markets, PDS and cooperative stores) dominates the retail landscape. Emergence of e-commerce has further changed the dynamics of Indian retail sector. E-commerce businesses that first started as Inventory-based models have since migrated to the Marketplace models to attract foreign investments. Government now under pressure to undertake systematic regulatory modifications on existing policies and regulations to maintain parity in the retail ecosystem. Analyze through a timeline study the policy regulations that were put in place at various stages in the retail evolutionary process, their immediate impact to the stakeholders and the long-term implications.

3 Till FDI in Multi Brand Retail Trade.. Pre-liberalization era restriction on imports and prohibition of foreign investment. Liberalization era (early 1990s) FDI in infrastructure, power, industrial parks, etc., FIPB establishment % FDI in Cash & Carry Wholesale Trade % FDI in Single Brand retail was allowed through the FIPB approval route GOI allowed 100% FDI in SBRT, 51% FDI in MBRT through the FIPB approval route (subject to several clauses), 100% FDI in e-commerce B2B trade under the automatic route.

4 Developments thereafter.. No separate distinguishable features mentioned in the FDI policy regarding Marketplace e-commerce. The gap provided an opportunity for online retail players to circumvent policy restrictions and explore the Marketplace space to draw up business structures. Websites serve as an Online Marketplace for other retailers/companies to sell their goods. Companies store their products in the online retailer s warehouses, but ownership of the product does not transfer to the online retailer. Companies pay the online retailer a fee for the storage and distribution of its products and for access to the website as a selling platform. Discussion paper by DIPP on e-commerce in India mentions GOI recognizing the Marketplace model as a facilitator of e-commerce.

5 Majority of the bigger players have been left with no option but to work around FDI restrictions by setting up backend B2B entities where 100% FDI is allowed (e.g. Flipkart). The foreign funding flows into such B2B companies which also hold the inventory. The front-end B2C companies are kept clear of FDI and only issue invoices and collect payments from customers.

6 Relevant issues While such structuring of businesses are in line with the provisions of the FDI law, they may not be in accordance with the spirit with which the law was brought into existence. The e-commerce player: displays products on the website, offers huge discounts, has a shopping cart where purchaser can place the goods to be purchased, has a payment gateway for purchaser to make payment through different modes, ensures delivery of goods to consumer, allows consumer to return goods back to the e-commerce player. all of which in effect construes B2C activities. RAI filed a petition against the Union of India with the Delhi High Court FDI restrictions put by the GOI to retailers in the physical world should be set aside as the GOI, while maintaining a full prohibition of FDI in e-commerce activities in the B2C sector, has sought to allow FDI in Marketplace B2C e-commerce.

7 Policy recommendations GOI should consider allowing FDI in B2C e-commerce as it will enable online retailers to also reach the consumers in suburban towns and cities, and rural areas. FDI policy norms for B2C e-commerce may be adapted from existing FDI regulations for MBRT: infrastructure investment, sourcing from SMEs. Phased-category approach currently maybe opened to the non-food category only, as cold storage facilities, warehouses, that will enable transportation of perishable food items still not in place. Initiatives to improve manufacturing sector Make in India initiative is a positive step in this direction to facilitate investment, build manufacturing infrastructure, increase skill development and to harness innovation. Leaving the decision to the State Governments to permit e-commerce will prove to be a major cause of concern. Undertaking sustained efforts through Public Private Partnerships to modernize traditional markets. Introducing a uniform tax regime like Goods and Service Tax (GST) across the country. Incorporation of Model Agricultural Produce Marketing Committee (APMC) Act in all states. Initiating a nationwide uniform license regime would remove over seventy regulations that requires retailers compliance before opening a retail store. Government announcements have to be backed with structural reforms regarding procurement, real estate, warehousing and logistics to support both sectors.