India may loosen FDI rules in the e-commerce sector to give “Make in India” a boost

• A draft policy for India’s burgeoning e-commerce sector is expected to be finalised by the end of the year.
  
• A key proposal calls for opening up e-commerce firms to 49% foreign ownership, only if they source domestically-produced goods.
  
• Since 2016, the government has allowed 100% foreign ownership in firms that employ the marketplace model, like Flipkart.

A draft policy for India’s burgeoning e-commerce sector has been in the works for a while. While a government committee, comprising nine sub-groups and led by Suresh Prabhu, the Minister of Commerce and Industry, is putting the finishing touches to the policy, a number of key proposals of have been revealed. And one, in particular, concerns the government’s “Make in India” scheme.

An FDI-focused taskforce led by Rita Teaotia, the secretary of the Commerce Ministry, has suggested allowing e-commerce platforms that utilise an “inventory model” to be as much as 49% foreign-owned. Currently, only food retailers are afforded this ownership allowance. E-commerce firms that use the inventory model manage their own inventory and actually own the products that are put up for sale, selling them to consumers directly.

However, foreign entities need to source these products domestically and the founder of the business needs to be an Indian resident. The move will likely give small-and-medium enterprises a boost and attract even greater investment to India’s e-commerce sector. The proposal will require the creation of an agency tasked with accrediting “made in India” products.

Currently, e-commerce platforms that have even a minimal foreign ownership aren’t allowed to deploy the business-to-consumer model. Since 2016, the government has allowed 100% foreign ownership in firms that employ marketplace models, like Flipkart, which was recently purchased by Walmart.

Companies employing the marketplace model act as facilitators between buyers and sellers. So, Flipkart doesn’t directly sell the product but gives registered companies a chance to sell their products.

A national regulator

The government committee has submitted a number of other proposals. These include a recommendation that calls for the data of Indian consumers be stored “exclusively” in India within two years. This precludes data not collected in India and the recommendation is line with the draft data protection bill released by the by the Srikrishna panel earlier.

Additionally, the draft policy also calls for the establishment of a national regulator for the e-commerce industry. This will be vital to ensuring that the interests of consumers and small businesses are safeguarded, especially amid fears that India’s e-commerce sector would be flooded with foreign-made products. The regulator will also ensure that all foreign investment caps are complied with.

The e-commerce policy is currently being fine-tuned, before being opened up to stakeholder consultations. It is expected to be finalised by the end of the year.