Is India’s E-Commerce Industry Too Regulated for Foreign Investment?

India’s e-commerce industry has received praise and condemnation in equal measures this week. Foreign spending, spearheaded by Japanese firm Softbank’s US $627 million investment in SnapDeal, has led experts to predict that the sector’s shares and market size will soon see a massive hike, but the news has been offset by heavy criticism of the way in which the Indian government regulates the industry.
 
E-commerce giant Amazon, despite increasing its sales in India by 50.2 percent in the year ending 31 March, has publically stated that confusing and difficult-to-navigate laws are negatively impacting the company’s operation in the country.  The firm even hinted that, should the government not improve the ease of conducting its particular brand of business there, it may influence Amazon’s future presence in the Indian market.
 
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Amazon likened its difficulties in India with those it has experienced in China. In a filing, the company said that: “Although we believe our structures and activities comply with existing laws, they involve unique risks. There are substantial uncertainties regarding the interpretation of PRC (People’s Republic of China) and Indian laws and regulations, and it is possible that the government will ultimately take a view contrary to ours.”
 
It added that: “Our Chinese and Indian businesses and operations may be unable to continue to operate if we or our affiliates are unable to access sufficient funding.”

The comments are inspired by the overall loss that Amazon made in India during the last fiscal year. Indeed, although the company improved upon its previous year’s performance, it still accumulated losses of Rs.321.3 crore. Having recently promised to invest US $2 billion into its India operation, the noticeable lack of profits is understandably causing Amazon to have second-thoughts.
 
The frustration of Amazon and other e-commerce firms likely stem from the way India structures foreign direct investment (FDI) around its online industries. At a time in which FDI in various Indian sectors has been drastically liberalized, the government still does not allow any FDI in online retail, and investment in e-commerce has remained limited at 51 percent for some time. In order to avoid punishment, e-commerce companies accordingly establish complicated structures that show they’re operating as marketplaces, but are still nevertheless often regulated by the Indian government.
 
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From India’s perspective, there is little incentive to alter the way in which it regulates its online industries at the moment. From 2009 to 2012, the Indian e-commerce market expanded from a value of just US$2.5 billion to US$8.5 billion, and further grew by an astounding 88 percent last year to reach US$16 billion. Despite the difficulties cited by companies like Amazon, the country still attracts a great many online firms, with the India Brand Equity Foundation (IBEF) recently finding that approximately one million small and large online retailers currently use the country’s numerous e-commerce portals.
 
This is likely because the appeal of India’s e-commerce industry is so great. Only around 13 percent of its population are active internet users, making India one of the most under-penetrated e-commerce markets in the world. Moreover, the country is now poised to reap the benefits of its demographic dividend, with 65 percent of its population aged between 15-65 and 29 percent below the age of 15. The Indian online market is therefore almost impossible to ignore.
 
Losses are commonplace when initially entering any market, and the potential benefits of what India’s e-commerce industry holds far outweighs the losses that Amazon is currently incurring. For e-commerce companies seeking to establish a presence in the promising Indian market, it may be that they will have to continue dancing to the government’s tune in order to make any headway, at least for the time being.
 
This article was first published on India Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
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