FDI stands for Foreign Direct Investment. It means the cross border investment made by the resident of one economy in an enterprise to another economy, with the purpose of establishing a lasting interest in the economy of investee.
In simple words it is described as investment into the business of a country by a company in another country. The investment is done into production, buying a company in other country or extending the operation of existing business in the target country. The benefit of FDI is cheaper wages and got tax exemptions offered by the country.
The E-commerce industry in India is growing very rapidly over the last 5 years. It raises a high income and it is easier to access the internet. Flipkart and Snapdeal in India offer a broad range of products at discounted prices and provide easy payment options and they had grown the India’s e-commerce Industry by 30% from earlier. Now India becomes more protective to its retail industry.
Now what is the relationship between FDI and e-commerce?
One group of e-commerce entrepreneurs argues that FDI would boost infrastructure development and manufacturing so there will be more efficient supply chain management and reduce costs while another group of e-commerce entrepreneurs argues that FDI in e-commerce sector may lead to multinationals availability of their cheaper products on the market may cause a negative impact on the Indian manufacturing sector generally on small and medium enterprises like small time businesses or kirana stores will be hurt by this, leading to large scale unemployment.
In India E-commerce accounts for only a small fraction of India’s retail industry why?
Foreign money coming into e-commerce sector will certainly boost the capital intensive industry which has been struggling for raising funds for facilitate expansion and attain economies of scale. Actually for increasing e-commerce, the main requirements is the accessing of internet but current estimates are that only 15 percent of population. The 2nd issue is that population of our country is illiterate so visual or voice application will be developed to encourage them for utilizing the internet for E-commerce. The 3rd issue is of using vernacular language not English. Broadband connection in India should be encouraged.
Way of receiving FDI in Indian companies
An Indian company may receive FDI via two routes. These are:-
1. Automatic route
FDI is allowed under the automatic route without the prior approval of government of reserve bank of India. For all activities/sectors included in FDI policy must be issued by government of India from time to time.
2. Government route
FDI is allowed under this route requires prior approval of the government which are considered by the Foreign investment promotion board, Department of economic affairs and ministry of finance.
FDI of e-commerce in India
FDI is totally banned in e-commerce before jury 2014. In august 2014 budget’ time the commerce minister’s statement comes at a time when Enforcement directorate is closely scanning the capital structures of various companies operating in the e-commerce scope.
Then it is found that many big e-commerce companies like Flipkart (retail) and many others violating the foreign exchange management act provisions
The problem is in the thin line b/w operations of B2B (wholesale) company and a B2C (retail) company. So currently, India permits 100% FDI in B2B e-commerce activities but not in B2C companies. B2C companies have to adopt the marketplace model. Wherein they take order but which are filled by other domestic retailers. But problem arises when domestic B2C e-commerce Company operates through the marketplace model but uses their other FDI funded ventures in the B2B space for retail.
The companies which broke the rule that is using FDI in B2C they can be shakeout from the sector. Flipkart have to raise money to pay the penalties which will be three times the investment.
Soniya
