Why Online Portals Are Opposing FDI In E-Commerce

The Indian e-commerce market is still fragmented by trade barriers. In a globalized market, prices will steeply decline, and quality of products will improve. At present, 100% foreign direct investment (FDI) is allowed only in business-to-business (B2B) e-commerce, but not in retail segment. In a discussion with the government, Indian e-commerce portals like Flipkart and Snapdeal have opposed allowing 100% Foreign Direct Investment (FDI) in business-to-customer (B2C) e-commerce.

Let us look into the central objections of national traders against allowing FDI in B2C e-commerce, published in a discussion paper of the Indian commerce ministry:

1. Small corner stores still remain a large source of employment. FDI will have disastrous impact on this sector leading to monopolies in logistics, manufacturing and e-commerce. It would cause large-scale unemployment.

Economists tend to disagree with this. It is true that free trade in e-commerce might lead to temporary unemployment in certain situations. But, free trade in e-commerce will also channel capital into more productive ventures because in a globalized world, consumers can purchase goods from businesses across the world. When capital flows from less productive ventures to more productive ones, it is the form of employment that changes. The level of employment does not fall in the long run. Greater FDI would lead to greater capital accumulation in the hands of more efficient, innovative businesses. Greater capital accumulation would lead to greater investment in machines and inventory. When there is greater investment in machines and inventory, productivity in the best e-commerce firms in India and abroad would rise, irrespective of whether it is Flipkart, Snapdeal or a firm in New York City.

2. Because of scale of operations, e-commerce players will have more bargaining power than standalone traders.

It is true that global e-commerce players with large scale operations will have greater bargaining power than standalone traders. But, small players have their own market niche. Though it is possible that certain standalone traders might shut shops, global e-commerce players are very unlikely to replace small traders. Economists generally agree that scaling up operations raise productivity. It is difficult to produce greatly, at a cheaper cost in businesses which operate on a small scale. But, by scaling up operations, firms can produce on a mass scale. When productivity rises, cost would fall and the quality of products would rise.

3. Allowing FDI in ecommerce will provide such players enormous geographical reach and this will be against the spirit of FDI in multi-brand retail which is restricted to cities with more than a million people.

It is true that allowing FDI in e-commerce would provide large firms to have enormous geographical reach. But, it would also give Indian consumers access to the best products across the world. When multi-brand retail is restricted to cities were population is greater than one million, consumers in cities with lower population levels will be cut off from global markets.