India still ponders allowing FDI in e-commerce

The country's inability to push through a law allowing foreign investment in e-tailing will stymie growth in the sector.

As further testimony on how much in the dark ages as a country India still is, here's an article that says the government, just a few days ago, circulated a discussion paper on FDI in e-commerce among stakeholders, hoping to approve it just before elections.

Here are some undeniable truths: GDP growth in India is stagnating at just above 4 percent or so. The country has a huge shortfall in skilled labour. Companies are unable to receive the kind of financing they need from local sources for expansionary plans. Our venture capital landscape is being strangled by the lack of exit opportunities. And we're still debating whether to allow foreign investment in multi-brand retail, let alone e-commerce.

Up until 2011, ownership in single-brand retail outfits was only allowed up to 51 percent. In January 2012, India allowed 100 percent ownership in single-brand stores (with the rider that they had to source 30 percent of material that went into these goods from Indian outfits, with some other stringent caveats about how big they should be). And towards the end of last year, it allowed 51 percent FDI in multi-brand retail, but subject to approval by individual states. Amazingly enough, the government hadn't yet thought of or figured out where e-commerce fit into all of this until it finally decided that foreign investment in e-tailing wasn't kosher.

The fact is, a lack of foreign fund flow in this space eventually means a weak sector. There are guaranteed to be fewer e-commerce sites bereft of global entities that have already proven operational expertise across geographies — especially those with quality operations. Also in shortage is cutting-edge know-how in implementing solutions from logistics to marketing, and an accompanying shortage of world-class talent that could help grow the space. Take Flipkart, India's leading e-commerce company, for instance. Its revenue grew 10 times from 2011 to 2012, but its most recently reported annual sales was $217 million, an anemic 2.7 times the previous year's number. You could argue that Flipkart is reaching market saturation — but another truth is that the ecosystem is not growing at the pace it should be.

Of course, it is terrible to think that while promoting the argument for allowing foreign investment in e-tailing, one is also propagating the relentless, mindless spending on unnecessary stuff thanks to the ease of a few clicks while in your underwear, leading to yet another credit bubble.

Yet, most of the arguments to prevent a funds inflow for e- or retailing seem questionable. The most strenuous one is that it will endanger the livelihoods of millions of shopkeepers who proliferate street corners in India. The truth is that the main opposition to FDI in retail comes from entrenched middlemen who make a killing on the spread for the prices of goods and services, and who have a huge amount to lose. Take a look at this fascinating account of how Dalits (the untouchable caste) in India are prevented from participating in the local Mandis — where produce from all over India is distributed from a central node in the city.

When the likes of Walmart and Germany's Metro were allowed into India around five years ago to set up wholesale marts called "cash and carry", they sparked a revolution in trade and expertise. Thousands of Indians were trained under global standards to provide everything from plastic buckets to seafood. The marts were then bought by an avalanche of new-generation shopkeepers from small towns, who would never have been able to start a business that sold goods of a global standard.

On the other hand, existing laws that allow only the likes of domestic retailing franchises like Reliance Fresh (which sells groceries) has not just seen the sector stagnate — tomatoes and onions still surge frequently by 150 percent, simply because all of the cold-chain and other logistics necessities that the retail industry requires has not yet happened thanks to the lack of global players entering the local stage, tying up with domestic entities and investing in local supply chains.

Till then, we'll continue to pay more for goods and services that aren't quite up to snuff.