Inventory-based e-com needs FDI: IAMAI-KPMG report

11 Sep,2013

An IAMAI-KPMG report “e-Commerce: Rhetoric, Reality and Opportunity” released on Tuesday has recommended that inventory-based e-commerce be opened to foreign direct investment (FDI). FDI in this format of e-retail is currently not allowed.


The report has suggested that disallowing FDI in this form of e-commerce is a curious policy not followed by many countries including US, China, Australia, Sri Lanka and Pakistan.


The report has established a direct co-relation between internet users, online buyers, value of e-commerce and openness to FDI in inventory-based e-commerce. The report found that India was the only one among a list of developed and developing economies that did not allow FDI in inventory based e-commerce.


The result of this policy may have a direct bearing on a) slowdown in the growth of internet users; b) proportionately low online buyers; and c) shrinking of the e-commerce business.


In the US, there are 245 million internet users and 156 million online buyers, while China has 538 million internet users with 270 million online buyers. Closer home, Sri Lanka, with 3.2 million internet users, has 2 million online buyers and Australia, which is a similar economy to India, has 20 million internet users with 11 million online buyers. Unfortunately, India, which is the 3rd largest in the world with 137 million internet users, has mere 25 million online buyers. It is evident that internet usage will grow much slower than expected if we do not increase online buyers.


Further, the report finds that online buyers and the size of consumer e-commerce industry are high in countries where FDI in inventory based e-commerce business is allowed. In the US, the size of the consumer e-commerce industry is US$224 billion, while in China, it is US$210 billion. In Sri Lanka, it is US$2 billion, while the size of the consumer e-commerce industry in Australia is US$30 billion. In India, with 25 million online buyers, the size of the industry is a mere US$13 billion. This co-relation is clear from the chart as collated in the report.


Salient Features Of e-Commerce in India, USA, China, Australia, Brazil, Sri Lanka and Pakistan

Source: Internet World Stats (2013); eMarketer (2013); Forrester McKinsey Global Institute (2013); Digital-Commerce, IAMAI-IMRB (2013); e-Commerce Disruption: A Global Theme, Morgan Stanley (2013)


Dr. Subho Ray

Commenting on the findings, Dr Subho Ray, President, IAMAI, said “On a larger canvas, we believe that inventory based e-commerce needs deep and sustained investments on technology and other back end operations, marketing and brand building areas where domestic investment is not forthcoming. Opening up of inventory based e-commerce would also take care of the current anomaly where FDI in multi-brand retail is allowed up to 51% whereas it is not allowed on inventory based e-commerce business.”


The report also makes other important recommendations such as more investments in innovation and customer servicing on part of the industry. According to the report, several issues exist on the demand side, supply side and government and regulatory side that need to be addressed to ensure rapid progress of e-Commerce industry in India. The relevant stakeholders would need to focus on some key solution areas to positively impact the e-Commerce industry and to put it on a transformational growth trajectory. These key solution focus areas have been identified as: a) Developing and building human capital; b) Adopting effective business practices; c) Strengthening the technology backbone; and d) Building a favorable yet controlled regulatory environment.


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One response to “Inventory-based e-com needs FDI: IAMAI-KPMG report”

  1. Priyanka says:

    Is FDI permissible in an online travel agency in india which is not necessarily inventory based?

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