Reforms unlock investment in India’s e-commerce scene

Protectionist policies have limited the ability of global e-commerce players to invest in the Indian marketplace, but reforms are finally taking shape. A new approach to foreign business by the state is gradually unlocking major opportunities for expansion and acquisitions in this space, and players such as Amazon have already poured capital into the country. Retailers from the London corporate finance space are likely to move into the market with greater confidence.

The Indian government has been protective of the retail industry, limiting foreign direct investment into the sector.  However, with Narendra Modi in power, there is hope that previous moves to open up the retail industry will be expanded albeit in incremental steps.  Foreign retailers should therefore continue to monitor the market thanks to its overall potential and even try to expand in it so long as they are aware of the need to be patient.

To grow its retail market, India will have to avoid the short sighted protectionism its political landscape often enables. One such avenue where India was decidedly closed off before 2012 was that of foreign direct investment (FDI). After previously allowing only a 51% investment in single brand retail, in 2012 the country rolled out a number of reforms to finally allow foreign retailers to sell a number of brands under one roof.

In 2013, the requirements for local sourcing and investment were relaxed a bit.  In one case, local sourcing was still required, but not just from small firms. Even this was rolled back later, having been changed from a requirement to a preference. Changes like this tweaked the previous rules to allow FDI to flow more freely to more possible firms.

These positive changes led to a flood of investment in the country. Among single brand retailers, IKEA entered the country that year to the tune of $1.95 billion as it focused on opening its own stores and thanks to the easing of sourcing rules, it plans on opening another 25 stores over the next ten years.  In 2014, global grocer Tesco entered into a joint venture with the Tata Group to take a 50% stake in the local Trent Hypermarket business, investing $140 million.

But for some retailers, bureaucratic red-tape continues to confound. Nike has been unable to open up a company-owned flagship store despite the new rules, thanks to a large presence in the country with 500+ franchise stores. Regardless of their ownership percentage, companies present in the country cannot run more than one retail format (e.g. company owned/franchised/ wholesale). There also remains significant confusion regarding the selling of subbrands that retailers such as Marks & Spencer and Zara have faced over the following years.

In 2014 Amazon put an additional $2 billion into the country to continue the expansion of its marketplace business. A number of apparel companies like H&M, Uniqlo, and Massimo Duty are slated to invest billions and open their first stores in the next couple of years.  The retail attitude towards India had often been described as “wait and see”, but with tangible progress over the past few years and a business friendly prime minister in place, the case for optimism is much stronger. However even those companies that want to enter India had better be prepared to wait.

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