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Journal of Management Engineering and Information Technology (JMEIT) 2394 - 8124

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FDI Directive 2019 and Impact on E-commerce Market a Case Study with Special Reference to

Amazon, Walmart-Flipkart and others with New Entry Reliance into the Market

Pawan Kalyani [email protected]

Abstract: The concept of research paper came up with the news related to FDI rules to be come into the effect form 01 Feb, 2019. According to the new rules late last year modified foreign direct investment (FDI) rules for its escalating e-commerce sector that has attracted Walmart and Amazon.com, creating new hurdles for both global retail giants. India allows 100 percent foreign direct investment (FDI) in various sectors and e-commerce is one of them. FDI is one of the major factor in impacting India’s economic growth. The current paper is an effort to understand and analyze present market situation of e-com retail giants and threat of new entry.

Keywords: FDI Directive 2019, Impact on E-commerce, Amazon, Walmart-Flipkart, Reliance

I. INTRODUCTION

Foreign direct investment plays a crucial role in channelizing transfer of capital and technology and perceived to be a potent factor in promoting economic growth in developing countries like India. They act as a long term source of capital as well as a source of advanced and developed technologies. The investors also bring along best global practices of management. As large amount of capital comes in through these investments more and more industries are set up. This helps in increasing employment. FDI also helps in promoting international trade. This investment is a non-debt, non-volatile investment and returns received on these are generally spent on the host country itself thus helping in the development of the country.

Introduction Foreign Direct Investment (FDI) is fund flow between the countries in the form of inflow or outflow by which one can able to gain some benefit from their investment whereas another can exploit the opportunity to enhance the productivity and find out better position through performance. The effectiveness and efficiency depends upon the investors perception, if investment with the purpose of long term then it is contributes positively towards economy on the other hand if it is for short term for the purpose of making profit then it may be less significant. Depending on the industry sector and type

of business, a foreign direct investment may be an attractive and viable option. Any decision on investing is thus a combination of an assessment of internal resources, competitiveness, and market analysis and market expectations. The FDI may also affect due to the government trade barriers and policies for the foreign investments and leads to less or more effective towards contribution in economy as well as GDP of the economy.[1]

II. REVIEW OF LITERATURE

Aggarwal (2005) found that rigid labour markets in Indian states discourage FDI. The effect of labour market rigidities and labour cost, however, was more pronounced for the export-oriented as compared to the domestic market seeking FDI. The study also pointed out that the presence of EPZ worked as a relevant pull factor for export oriented FDI. Econometric evidence found in the study suggested that infrastructure, regional development and human development were also key factors in attracting higher FDI both in the export and domestic market sectors. In a study on business environment, clustering and industry location in the Indian Cities, using firm level data collected in the 2003 round of the Investment Climate Survey (ICS) for India [2]. Chidlow and Young (2008) found that Polish regions differed substantially in attracting foreign capital and the regional characteristics mattered in the selection of location. using survey data from an online questionnaire and a multinomial logit model incorporating investor specific characteristics, they showed that knowledge-seeking factors alongside market and agglomeration factors, acted as the main drivers of FDI to Mazowieckie region (including Warsaw), while efficiency (low input cost, availability of labour and resources) and geographic factors encouraged FDI to the other areas of Poland[3]. In the context of the United States, Coughlin, Terza and Aromdee (1989) found that the number of potential sites, state per capita income, and manufacturing density within a state, better transportation infrastructure, higher unemployment rates and higher expenditures to attract FDI were positively linked to FDI flows. On the other hand, higher wages and higher tax rates had negative impact on FDI flows [4]. Fisher and Peters (1998) found that incentives offered by various states had a positive impact on investment flows to the

Volume 6 Issue 1, Feb 2019, Online ISSN:

Journal of Management Engineering and Information Technology (JMEIT) 2394 - 8124

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US. Incentives considered in their study include job credits, property tax abatements, sales tax exemptions, grants, loan guarantees, firm specific job training and infrastructure subsidies. Within the European Union member states, the long term trends point out the existence of a negative relationship between taxation and FDI inflows [5]. Ramachandran and Goebel (2002) pointed out that Tamil Nadu had emerged as one of the most favored investment destination in India on account of a number of advantages viz., strong and stable government with pro-active government policies, investor-friendly and transparent decision making process, sound diversified industrial infrastructure, comfortable power situation, abundant availability of skilled manpower, harmonious industrial relations and absence of labour unrest, high quality of work culture and peaceful life, best incentives package in the country, highly cosmopolitan composition and high proportion of English speaking population. FDI in Tamil Nadu is dominated by investments in the IT sector [5]

The theory and the literature suggest that the most important factors of FDI flows within a country include the size and growth of the local market, the level of industrial activity, the growth of the services sector, the availability and quality of physical infrastructure, quality of labour, government policy environment and tax incentives and the presence of cluster economies.

In progress, research paper the author is concentrating upon the FDI in e-com market, as per earlier studies done by various researchers the market size and growth in digital service sector and the growth in the internet users especially in mobile users helps in the increase in the online market activities.

Fig. 1. Showing the Digital population in India as on Jan 2018 Source: https://www.statista.com/statistics/309866/india-digital-

population/

Fig. 2. Showing the Number of Internet users in Asia Pacific region [India] as on Jan 2018 [6]

Source: https://www.statista.com/statistics/265153/number-of-internet-users-in-the-asia-pacific-region/

The above statistic shows the number of internet users in the Asia Pacific region as of January 2018. As of that month, China had 751 million internet users. Second-ranked India accounted for 462 million internet users. The information shows the growing market size of internet uses in India, it has second biggest population in the world and second rank in number of internet users, this give the promising market for online e-com business and usual attraction for FDI in India. Another important thing in this concern is 100% FDI in e-com sector.

Due to increase in e-com activities the selling and purchasing trough digital platform has been increase in recent past, another associative sector of e-com business the logistics, used to deliver the products all over India is growing up. With the advent of online e-commerce in India, consumers have benefitted from increased competition in the market by way of getting access to greater variety of products at competitive prices. Another benefit in this field has been the development in the area of logistics (delivery partners), which has provided employment to a significant number of people.

E-Commerce platforms have also given access to producers/sellers in far-flung areas of the country. Sellers of high-quality products have prospered with greater access to consumers. Producers of niche articles have also benefited. There are several instances of symbiotic growth where producers of traditional products have been provided opportunities to create steady supply of items for sale. This has resulted in ‘on-boarding’ of small traders and manufacturers. Backward linkages have helped in making such traders and manufacturers internet-ready and aware of the benefits of selling online. This has been a welcome byproduct. Online has benefited both skilled workers by being a source of employment generation as well as consumers by providing ready and reliable source of services.

Impact Factor: SJIF 6.265 (2016) | 4.564 (2015)Volume 6 Issue 1, Feb 2019, Online ISSN:

Journal of Management Engineering and Information Technology (JMEIT)



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III. FDI

The FDI Policy in e-commerce has been developed in order to ensure that the marketplace provides a level playing field to all participants, while ensuring that distortionary effects, either through means of price control, inventory or vendor control does not happen. A situation of capital dumping is to be strongly discouraged. The policy aims to clearly demarcate what constitutes a marketplace model and what comprises an inventory-based model of sale and distribution. The policy aims to invite and encourage foreign investment in the ‘marketplace’ model alone. An e-commerce platform, in which foreign investment has been made, therefore, cannot exercise ownership or control over the inventory sold on its platform. In this manner, foreign investment is not seen as a threat by small offline retailers of multi-branded products.

Fig. 3 Showing Decisions taken on FDI in the meeting chaired by the Prime Minister on 16.7.2013 [7]

Source-http://pib.nic.in/newsite/erelease.aspx?relid=97252

The Department of Industrial Policy and Promotion (DIPP) of the Ministry of Commerce and Industry, Government of India has issued Press Note No 2 (2018 Series) on 26 December 2018 (PN 2 of 2018). PN 2 of 2018 amends paragraph 5.2.15.2 (e-commerce activities) of the current ‘Consolidated FDI Policy’ of the DIPP effective from 28 August 2017 (FDI Policy), effective from 1 February 2019. Paragraph 5.2.15.2 (ecommerce activities) incorporates the provisions of Press Note No 3 (2016 Series) dated 29 March 2016 (PN 3 of 2016), pursuant to which foreign direct investment (FDI) up to 100% was allowed under the automatic route in entities engaged in the marketplace model of e-commerce, subject to compliance with certain conditions.

IV. FDI INFLOWS IN INDIA

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Fig. 4. Showing the FDI inflows in India as from 2000-2018 Source:https://dipp.gov.in/sites/default/files/FDI_FactSheet_1Februa

ry2019.pdf [8]






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V. FDI POLICY- FDI POLICY CIRCULAR OF 2017

Fig. 5. Showing DIPP website with the link to the FDI Policy [9]

Source: https://dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy

Fig. 6. Showing details to the FDI Policy [9] Source: https://dipp.gov.in/foreign-direct-investment/foreign-direct-

investment-policy






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VI. THE AREA OF CONCERN- 5.2.15.2 E-COMMERCE ACTIVITIES

Fig. 7. Showing the FDI Policy- 5.2.15.2 e-commerce activities [10]

Source: https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEAS

ED_28.8.17.pdf

VII. AMENDMENT TO THE EXISTING FDI POLICY IN

E-COMMERCE ON 26TH OF DECEMBER 2018






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Fig. 7. Showing the FDI Policy- 5.2.15.2 e-commerce activities –

amendments [11] Source:

http://pib.nic.in/PressReleaseIframePage.aspx?PRID=1557380

Many of the changes introduced by PN 2 of 2018 require some additional clarifications regarding their applicability and scope. The effects of PN 2 of 2018 will be felt through the industry and it may force a number of influential players to re-examine their respective business models going forward. Given the short time within which the changes pursuant to PN 2 of 2018 are sought to be implemented, Marketplace Entities would need to quickly take measures to comply with such provisions. In the meanwhile customers can optimistically expect an extended “sale” season to continue. A clarification from the DIPP on grandfathering of existing structures and the forward looking applicability of PN 2 of 2018 (i.e., only to those Marketplace Entities that receive FDI on or after 1 February 2019) would be appreciated by the industry. This is also relevant keeping in mind India’s push for ease and certainty of doing business in the country and its commitments under investment treaties.






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VIII. FDI PROS and CONS

PROS • Helps in economy • MNC helps in boosting business and providing

employment. • Helps the nation in generating huge investments that

cannot be done on their own. • Huge investments should source from other countries to

generate business and employment that can be done through FDI.

• Elimination of monopoly of local companies, by inviting FDI in various sectors and to increase quality in the products by increasing standards of production.

• Services will be more customer centric, as competition will increase.

• Increase in employability by enhancing the skills of labor, by training and enhancing the productivity of employees.

CONS • Labour exploitation • Draining of Money • Loss of business to the local companies • Later on, prices will be determined by MNC as there is

no local competitor available to counter.

IX. E-COMMERCE GIANTS AND NEW AMENDMENT IN FDI POLICY

The market is full of news and views about the action to be taken against new amendment in FDI policies by E-commerce giants like Amazon and Walmart- flipkart as their major revenue is coming through inventory based model. As per the new amendments in the policy they cannot sell those products in which they are having stakes in inventory based model.


amendments effects in news and views [12] Source: https://www.domain-

b.com/infotech/ebusiness/20181227_online_market.html


amendments effects in news and views [13] Source: https://inc42.com/buzz/walmart-may-exit-flipkart-as-tough-

new-fdi-rules-bite-morgan-stanley/


amendments effects in news and views [15] Source: https://www.financialexpress.com/industry/sme/new-e-commerce-rules-headache-for-flipkart-amazon-mixed-bag-for-

customers-win-for-small-retailers/1431535/






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amendments effects in news and views [16] Source: https://qz.com/india/1525199/modis-new-fdi-rules-will-

badly-hit-amazon-india-flipkart/


amendments effects in news and views [17] Source:

https://www.forbes.com/sites/timworstall/2016/08/18/walmarts-reaction-to-indias-100-fdi-rules-will-benefit-the-indian-economy-

and-consumer/#12d153f5595b


amendments effects in news and views [18] Source: https://www.thequint.com/news/business/100-fdi-in-e-

commerce-what-it-means-for-companies-and-customers


amendments effects in news and views [20] Source: https://www.thequint.com/tech-and-auto/tech-

news/government-permits-100-fdi-in-online-marketplaces

The new norms will restrict marketplace players, including Flipkart and Amazon, from selling the products of companies in which they hold stakes, as per new amendment in the FDI policy.

Amazon, which holds stakes in Cloudtail India and Appario Retail, will not be able to sell their goods as per the new policy.

Likewise, Walmart, which owns online marketplace Flipkart, will not be able to sell their inventory online.

Amazon and Flipkart may lose up to 40% in revenues—between Rs35, 000 crore ($5 billion) and Rs40,000 crore—by 2020 due to the tightening of FDI norms, according to CRISIL Ratings.

“The impact on e-retailers would be largely in the electronics and apparel segments, which account for a bulk of their revenues,” said Anuj Sethi, senior director at CRISIL.

Fig. 15. Showing the FDI Policy- effects in China Source: Bloomberg website

“World’s largest retailer Walmart perhaps let go of its last year’s $16 billion Indian e-commerce bet as it may exit Flipkart after the government implemented the revised FDI rules for e-commerce companies on February 1, IANS quoted American investment banking firm Morgan Stanley.

“An exit is likely, not completely out of the question, with the Indian e-commerce market becoming more complicated,” Morgan Stanley said in a report late Monday.

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This might go the similar way to what happened with Amazon in China in late 2017, according to the report.

“There is a precedent for an exit as Amazon retreated from China in late 2017 after seeing that the model no longer worked for them,” it said.

The report estimates that 50% of Flipkart’s revenue comes from this category that means Flipkart could face “meaningful disruption and top-line pressure” in the near future.

Morgan Stanley said that the new guidelines may require Flipkart to withdraw as much as 25% goods from its portal such as smartphones and electronics that makes up for bulk of sales.”[20]

The news and views of likely exit from India’s online business of Amazon or Walmart is in the market it will be very similar to the china’s experience of Amazon due to its FDI policies in 2017.

Fig. 16. Showing the advertisement for Amazon’s “Great Indian Festive Sale”

Source: Internet

Another anticipated action from the e-tailer, a discount war on products which are in heavy quantities in holding of parent companies. Things like “sale” with heavy discounted prices as the time is less and the new FDI amendments will be in effect from 1, Feb 2019.


amendments effects in news and views [21] Source: https://www.theweek.in/news/biz-tech/2019/01/16/FDI-in-e-commerce-Amazon-Flipkart-seek-extension-of-Feb-1-deadline.html

Amazon and Walmart-owned Flipkart have sought an extension of the February 1 deadline for complying with the revised FDI norms in e-commerce, stating that they need more time to understand the details of the framework.

X. FDI AMENDMENTS -1 FEBRUARY 2019 - EFFECT – ADJUSTMENTS BY E-COMMERCE

GIANTS

Amazon and Flipkart demands for extension of deadline were rejected by the government.


amendments effects in news and views [22] Source: https://entrackr.com/2019/02/fdi-rules-amazon-flipkart-

businesses/

The big giants have to follow the new FDI guidelines to do business, as their application for the extension were rejected by government.


amendments – Adjustments by E-com giants [23] Source: https://www.firstpost.com/business/new-fdi-norms-in-e-

commerce-amazons-jv-with-catamaran-in-prione-business-services-undergoes-rejig-cloudtail-makes-a-comeback-6047081.html

There has been a major reforms in the structure of the companies that holds the major stakes in the online e-business giants, like Cloudtail and Appario retail, they have cut down the percentage stake in these firms according to the new amendments in FDI policy in effect from 1 Feb, 2019 to avoid






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losses and anticipated exit from Indian market as they cannot afford to lose second largest market in the world

Fig. 20. Showing the FDI Policy– amendments – Adjustments by E-com giants source: TOI

As per the news in various daily local confirms the action taken by these e-com giants like Amazon other ventures have increased stake in these firms to cut down the previous stake and shape according to the new FDI policy. In this manner they have solved the big issue and avoided the rate cut or discount option sale and anticipated exit from the Indian market. As for now the effect is being neutralized by adopting reforms in the structures and shaping the older joint ventures into new avatars but there is a new threat coming in form of Reliance.

XI. NEW THREAT TO THE E-COMMERCE GIANTS – RELIANCE

Fig. 21. Showing Reliance announcement to enter in E-com business

[24] Source:https://www.livemint.com/Companies/QYDmQoNoYiCQMh

ESu3CLaN/Reliance-takes-on-Amazon-Flipkart-in-India-ecommerce-slugf.html

Reliance Industries will integrate Reliance Retail's physical marketplace with Reliance Jio's digital infrastructure for an e-commerce platform, says Mukesh Ambani at RIL AGM. “Reliance is planning to enter the e-commerce business by combining the best of online and offline shopping experiences, a business model that will require zero cash burn to acquire customers.

As part of the plan being put together by two of Reliance Industries Ltd.’s (RIL) consumer-oriented units—Reliance Jio Infocomm Ltd and Reliance Retail Ltd—the company plans to sign on local merchants, boosting their sales through what is known as O2O (online-to-offline) marketplace, a business model that Chinese e-commerce giant Alibaba has pioneered, said one person with direct knowledge of the matter, on condition of anonymity”.[25]

Reliance is becoming new threat in the online business for these e-commerce giants as it has its deep presence in India’s market and larger customer base and offline stores as well. Reliance Industry is planning a hybrid model in which an online – offline integration will be there to provide the customer satisfaction In terms of products and services.

“Reliance Jio initiative, the company may not yet have a full-blown plan for the project going ahead. They may keep critically evaluating the process as the pilot project progresses. The corporates they have managed to include in the project are ITC, Wipro, Dabur, Tata Beverages, Godrej Consumer Products and Amul; quite an impressive line-up.

The modus operandi is explained thus: the offers from the brands are sent to the Reliance Jio subscribers on their mobile phones in the form of digital coupons. The corner stores (Mom & Pop Stores) who sign up will also be supplied with the






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required software to read the digital coupons on their devices and sell the goods as planned. The subscriber will have the option to make payments through Jio Money or any other means, including cash, if it is accepted by the store”.[26]

A hybrid structure to compete in online market as planned by Reliance could be new threat to these online e-com giants, but still the project is in the trial or pilot project and yet to be tested in the real world situation but one thing is certain that this initiative from Reliance will bound to think about alternative strategies to counter.

CONCLUSION

To conclude the paper, the study of current research paper’s title gives many new hopes and reforms in the structures of big giants of e-commerce. The government of India has amended the FDI policy for e-commerce, FDI is a tool for nation’s economic growth and development it generates employment as well as develops market and customer centric market. As per rules there is 100% FDI allowed in the market place model of e-com and it is restricted in the inventory based model to safe guard the interest of local players to build a healthy equilibrium.

The e-commerce giants, have restructured their joint ventures and cut down the stake below 25% as per the guidelines of FDI policies to cope up with the situation saving their loses and anticipated exit from the world’s second largest market.

Threat of new entrant, Reliance initiative to make an entry into e-commerce business with a different approach online – offline model, could be a great threat to current dominant players I the online business. As Reliance has strong customer base and deep penetration in the market.

The new model is yet to be tested in its full flavor but it is anticipated that it will definitely do the damage to the present position of online giants, they are already in damage control situation.

In coming future, the e-commerce market will be customer centric approach with benefits and discount options available with many alternatives.

REFERENCES

[1.]https://www.slideshare.net/ijsrneteditorial/impact-of-foreign-

direct-investment-on-indian-economy [2.] Aggarwal, Aradhna 2005. “The Influence of Labour Markets on FDI: Some Empirical Explorations in Export Oriented and Domestic

Market Seeking FDI across Indian States”. Paper presented at the competitive section of the Global Conference on Business and Economics, held at the Oxford University, London, 25- 27 June, 2005.

[3.] Chidlow, Agnieszka and Stephen Young 2008. “Regional Determinants of FDI Distribution in Poland”. William Davidson Institute Working Paper No. 943.

[4] Coughlin, Cletus C., Joseph V. Terza and Vachira Aromdee 1989. “State Characteristics and the Location of Foreign Investment within

the United States: Minimum Chi-Square Conditional Logit

Estimation”. Federal Reserve Bank of St. Louis Working Paper

No.1987-006B [5] Ramachandran, Vijaya and Jeffery Goebel 2002. “Foreign Direct

Investment in Tamil Nadu: Review and Comparison across Host Sights”. Centre for International Development. Harvard University [6.]https://www.statista.com/statistics/265153/number-of-internet-

users-in-the-asia-pacific-region/ [7.]http://pib.nic.in/newsite/erelease.aspx?relid=97252 [8.]https://dipp.gov.in/sites/default/files/FDI_FactSheet_1February20

19.pdf [9]https://dipp.gov.in/foreign-direct-investment/foreign-direct-investment-policy

[10.]https://dipp.gov.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17.pdf

[11.] http://pib.nic.in/PressReleaseIframePage.aspx?PRID=1557380 [12.]https://www.domain-b.com/infotech/ebusiness/20181227_online_market.html

[13.]https://inc42.com/buzz/walmart-may-exit-flipkart-as-tough-new-fdi-rules-bite-morgan-stanley [14.]https://www.financialexpress.com/industry/sme/new-e-

commerce-rules-headache-for-flipkart-amazon-mixed-bag-for-customers-win-for-small-retailers/1431535/

[16.]https://qz.com/india/1525199/modis-new-fdi-rules-will-badly-hit-amazon-india-flipkart/ [17.]https://www.forbes.com/sites/timworstall/2016/08/18/walmarts-

reaction-to-indias-100-fdi-rules-will-benefit-the-indian-economy-and-consumer/#12d153f5595b [18.]https://www.thequint.com/news/business/100-fdi-in-e-

commerce-what-it-means-for-companies-and-customers [19.]https://www.thequint.com/tech-and-auto/tech-news/government-permits-100-fdi-in-online-marketplaces

[20.] https://www.financialexpress.com/industry/sme/amazon-might-experience-deja-vu-due-to-likely-exit-from-flipkart/1477570/

[21.]https://www.theweek.in/news/biz-tech/2019/01/16/FDI-in-e-commerce-Amazon-Flipkart-seek-extension-of-Feb-1-deadline.html [22.]https://entrackr.com/2019/02/fdi-rules-amazon-flipkart-

businesses/ [23.]https://www.firstpost.com/business/new-fdi-norms-in-e-commerce-amazons-jv-with-catamaran-in-prione-business-services-

undergoes-rejig-cloudtail-makes-a-comeback-6047081.html [24.]https://www.livemint.com/Companies/QYDmQoNoYiCQMhESu3CLaN/Reliance-takes-on-Amazon-Flipkart-in-India-ecommerce-

slugf.html [25.]https://www.livemint.com/Companies/tJefZpob9rslCfUTxyhL0I

/Inside-Mukesh-Ambanis-Reliance-ecommerce-plan.html [26.]https://www.thenewsminute.com/article/reliance-jio-plans-grand-e-commerce-entry-using-kirana-shops-71667

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