When is Ecommerce going to be fully liberalised?

The recent budget is being widely hailed as a balanced attempt at fiscal consolidation while managing the agrarian economy, building social infrastructure and encouraging financial reforms.

By Punit Sindhwani, Member of Ecommerce Coalition and Founder, Mirchimart  
Wednesday, March 2, 2016

The recent budget is being widely hailed as a balanced attempt at fiscal consolidation while managing the agrarian economy, building social infrastructure and encouraging financial reforms. In the din of the congratulatory noises and some acrid reactions to the proposed EPF tax regime, what is lost is the small voice of independent sectors that could have made a big difference if they had been heard.

The excitement and expectations built up on the back of frequently declared intentions of making India a hub of manufacturing and the justifiably vaunted ideals of Start-Up India, Digital India, Make in India, have held out expectations of a dramatic intervention to the current regulatory regime for the e-commerce sector. E-commerce is a microcosm of each of these initiatives and involves components of Make in India, Digital India and Start-Up India in an alchemy that holds exponential power for growth. But it is clear that the government has chosen to see each of these initiatives as independent motors of growth rather than an integrated ecosystem that runs on shared dynamics.

Foreign investment is a key component driving the Make in India programme. It would be disingenuous to pretend that we are not aiming for foreign investment when every allowance in the current budget is designed to make India attractive to foreign investors. The easing of doing business is not an isolated idea for excellence per se. It is a derivative of our desire to draw more money into our industry, manufacturing and services. That is why the budget made a dramatic allowance of 100 per cent FDI in food processing, a sector considered for long to be a holy cow.

But contrast that with the reticence to allow FDI in e-commerce, which is powering on as the single fastest growing sector in a limp economy, and you get the feeling that there is a bureaucratic mind block about it. The attitude and reflex on allowing FDI in retail and e-commerce has exhibited at different times both paranoia as well as schizophrenia. Regulations have failed the essential test of parity, for while FDI in single-brand brick-and-mortar retail is allowed in the automatic route, and it was allowed similarly for single-brand e-commerce too, it trips at the point where multi-brand retail comes in.

This regulatory attitude is inimical to the spirit of the start-up culture in general and e-commerce in particular because there are even greater impediments constructed for this sector. For example, the restrictions on access to foreign capital for inventory-led B2C e-commerce platforms have forced most e-commerce companies to operate within the limitations of the far less efficient B2B model. The chasm between the B2B model and the B2C model is an artificial divide unknown to markets in the free world.

Entrepreneurs in India are dealing with a regulatory deformity that cannot be explained easily except by assumptions of satisfying a constituency of traders who had earlier objected to the idea but who have now themselves jumped on the bandwagon and set up e-commerce sites or become happy partners with it.

Different FDI regulations for the varied business models only seek to restrict rather than enable the growth of the industry. Repeated representations to the Department to look at this objectively have failed. Even the taxation regime for e-commerce hangs like a Damocles' sword over the sector, which is almost in terror for delivering the fruits of employment, infrastructure augmentation and manufacturing boost.

Everyone agrees that the ecosystem created by the growth of e-commerce has been exponential. Estimates indicate that close to $25 billion will be needed over the next five years to scale up warehousing, delivery, data centres, customer service, product development and technology upgradation.

This investment could potentially create over 7 lakh jobs directly and millions more indirectly. It stands to reason that this would also trigger large-scale investments by product manufacturers into India, to make and sell in India. [The Chinese firm Xiaomi is setting up a plant and data centre in India, based on the success it has had selling exclusively through the e-commerce channel.] Liberalising entry of foreign capital, technology and expertise in the sector can create a multiplier effect for local manufacturing, immediately and without long gestation.

The absence of any indications of allowance of FDI in B2C e-commerce or any clarification in rules of operation or simplification of taxation regulations in the Budget have left the status quo unchallenged and the distinct feeling that government regulation continues to belie the optimism we hold about ambitious national growth programs.

Still, there are encouraging signs in this budget. We see distinct forward movement in the impetus offered to the food processing industry where it has been allowed 100 per cent FDI. It stands to reason that if the food processing industry and retail sector could be allowed access to FDI, it must follow that e-commerce, which is fuelling the retail and infrastructure boom, follows suit.

The reduction and removal of corporate tax on new manufacturing units, small units and new companies should make a positive impact on MSMEs and suppliers to e-commerce platforms.

The government has also withdrawn the six-day stipulation for small retail units, which will have a salutary effect on sales and man days of employment. We believe that the e-commerce industry is also ripe for just such a reformist agenda, which would level the e-commerce field by removing the artificial barriers created between the B2B and B2C models and allowing FDI in the sector without distinctions.

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