Yes, Open Up Ecommerce Inventory to FDI — Just for Export

The government is considering allowing e-commerce companies with foreign direct investment to hold inventory, strictly for the purpose of exports. This is welcome. The government should go ahead and convert the proposal into policy action.

Right now, e-commerce companies in which foreign investors hold a controlling stake are permitted only to operate marketplaces, in which retail consumers buy from sellers, with the e-commerce company only facilitating the transaction by operating the platform where sellers list and display their wares and buyers come to shop.

Considered in itself, if we take away the current context of exports facing a squeeze owing to the 50% import duty that President Trump has placed on Indian exports to the US, the proposed FDI-liberalisation would appear to be half-baked. It would seem like the typical knee-jerk response to a crisis by a government keener to be seen doing something than to do something sensible.

Permitting the same e-commerce platform to hold inventory when exporting and be penalised for holding inventory while selling domestically is rife with regulatory complexity, the potential for opaque rules and rent-seeking. It would seem irrational to support such a policy change and call it reform.

But we need to take into account two additional factors. One, a solid history of Indian policymakers taking cover behind crises to buy political protection from those invested in the status quo, while undertaking any significant change to the status quo. Two, the ongoing rapid expansion of Quick Commerce that is disrupting traditional retail in any case.

In the run-up to the 1991 reforms and opening up, the government prepared the ground well to justify radical reform. India pawned its gold abroad. Most Indians thoroughly understand the financial, metallic and semiotic implications of pawning gold. The widespread realisation of distress and crisis was subsequently used to push through reforms derived from IMF conditionality attached to a balance-of-payments bailout loan.

No conditionality sought the removal of the Monopolies and Restrictive Trade Practices Commission that was included in the radical industrial policy announced before the historic budget presented by Dr Manmohan Singh and widely remembered as the instrumentality of reform. Narasimha Rao well understood the need to scrap MRTPC, whose clearance had been mandatory, if delicensing were to have substantive effect.

Stock market crises preceded regulatory and mandated technological reform, such as a SEBI backed by statutory powers, electronic trading that made arbitrage across India’s many stock exchanges redundant, and dematerialisation of shares to be held in depository accounts.

This is part of India’s institutional muscle memory when it comes to radical revamp of policy. Ever since demonetisation of high-value notes had been sold to the people as a way to eliminate the ill-gotten black money of the filthy rich, the political base of the ruling dispensation had widened far beyond its traditional supporters, the traders. The government needed to carry out reform that advanced the interests of the broad populace, and, to that end, could afford to ride roughshod over the trader lobby. But to do that would be bad politics. So, it keeps traders mollified, if not quite ecstatic, by not clamping down on FDI in e-commerce, so long as it did not hold inventory and only operated an electronic marketplace.

Foreigner-operated e-commerce, whether Amazon or Flipkart, has been a boon for consumers, manufacturers, sellers, small businesses, and financiers. Yet the full benefit of drawing on the expertise, technology and capital of e-commerce giants to optimise efficiency in sourcing, transport, storage and delivery has been pre-empted by disallowing foreigner-controlled e-commerce companies to hold inventories.

Not having to hold inventory makes for a capital-light business model. But not being allowed to hold inventory makes it a tricky business for e-commerce giants to handle logistics for sellers listed on the platform. It also places difficulties on sellers, such as having to register their business in all the states where they sell and having premises in all those states that local officials could visit to inspect. 

The crisis for exporters created by Trumpian disruption of world trade provides an occasion for the government to rationalise its e-commerce policy. A beginning can be made with allowing inventory for exports. Indian goods have to compete with goods from other countries for the consumer’s dollars. It must be priced competitively, not just have merit in terms of appeal and functionality. That means the e-commerce platform that sources goods for export need to get into their transport, storage, classification, handling and shipping, the entire supply chain, and not just the paperwork in India and the export destination. That means holding inventory.

What happens if an e-commerce platform that has sourced goods for export has some items left over after meeting export demand? Logically, the goods can be sold domestically, in the marketplace model. That means selling the good back to the producer, for it to sell on the marketplace. But these export surplus items would have come through superior supply-chain efficiencies and would be available at a cheaper price, as compared to similar goods sold on the marketplace sourced and sold by small sellers as in the past.

Who should capture this lower cost? The consumer, the seller or the marketplace? If the seller wants to expand its market share, it would pass on the saving to the consumer. But to keep selling at this price, the seller would have to undertake the same supply chain efficiencies that the inventory meant for export had benefited from. Yes, it can be accomplished through extensive contracting between the seller and the e-commerce company to keep ownership with the seller all through transport, storage, and handling, while these functions are carried out by the e-commerce platform on the seller’s behalf. That would mean e-commerce holding inventory with a fig leaf in front. It would take only a small gust of further reform to blow the fig leaf away, and convert de facto into de jure.

Why would the government not be so averse to such inevitable playing out of the logic of holding inventory just for export? Does it no longer care about the fate of small traders and shop owners? Retail trade in India, particularly in the larger towns, is under pressure to reform and adapt, thanks to the growth and spread of Indian-owned Quick Commerce platforms.

When Indian-owned q-commerce forces the pace of market evolution, that takes the heat off foreign-owned e-commerce as the primary market disruptor. The government would be off the hook for disruption.

Let us see the proposal to allow FDI into e-commerce with inventory for exports not as a bit of rational policymaking but as a variant of that old cry, “Somebody stop me!”

Also Read: A Clear Choice: Open FDI Fully or Close the Door