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Long term implications of 100% FDI in E-commerce

The growth of e-commerce in India has been stupendous. From online websites to mobile applications and digital platforms one can almost buy any service or product just by the click of the mouse. Owing to the greater adoption of smart phones and technology and with the government’s plans to completely digitize India with its Digital India program, it has now introduced 100% FDI in e-commerce platforms.

What does 100% FDI mean for Ecommerce business in India?

This means several large international players can enter India and establish their online marketplaces with 100% ownership without having to be in a joint partnership with an India based company.This also means online marketplaces will not be able to provide deep discounts to its consumers thereby restricting them from predatory pricing. Online retailing companies will have to design unique and innovative services to keep their market share.

What is Marketplace model as defined by DIPP?

Department of Industrial Policy and Promotion has also clearly defined the two highly prevalent models on which online businesses operate in the country. Online marketplace model is one wherein an IT platform is provided across the electronic and digital network and the e-commerce player operating on such a model which act as a facilitator between the buyer and the seller.

Inventory based model is one wherein a well-defined stock of goods and services is owned by the e-commerce company and further sold directly to its consumers. These clear definitions are aimed at clearing out any ambiguities surrounding the e-commerce businesses in the country.

With the control on predatory pricing and deep discounts the move surely cuts back on large sales for e-commerce companies but at the same time will result in reducing their losses considerably. As companies have been burning cash to create large flash sales with immense discounts in order to lure customers and get their fair share of the Indian consumers’ wallet. This move will certainly help in enhancing the profitability of e-commerce businesses however valuations of several e-commerce players may shrink.

How does the policy restrict e-commerce companies?

So far e-commerce companies have been chasing customers with deep discounts, flash sales by undercutting the sale price and actually selling products in large volumes by offering them below the cost price at times. The government has introduced a simple rule to control this maddening situation. Only 25% of sales are permissible by a single vendor on a particular e-commerce platform. Many companies have been flouting the marketplace rule by managing to churn up a large chunk of sales through their group companies. The move certainly helps in bringing down such practice and prepares companies to conduct their businesses ethically on an even playing field with the offline retailers.

100% FDI and the rules along with it not only benefits e-commerce companies in a way but is also welcomed by brick and mortar retailers & small e-commerce companies which are happy with the 25% cap on sales by a single vendor on one e-commerce platform. Also clear definitions of marketplace and inventory based models have brought a big relief to retailers. The move will result in transparency and clarity of operations & roles played by e-commerce companies such as Moglix while conducting their day to day business.

The impact of this change will also be felt in the real estate sectors as new players will require a large office space for their backend staff. There will also greater demand of space foe warehousing. Since an important part of their customers reside in tier 2 and tier 3 cities, the demand for warehousing facilities around these areas will increas