FDI easing in e-commerce could pave way for wider opening of online retail sector: GTRI
The government has permitted the inventory-based model of e-commerce to receive foreign direct investment (FDI), but strictly limited to the export of goods manufactured or produced in India — domestic B2C sale via this route remains barred.
A trade policy think tank, the Global Trade Research Initiative (GTRI), assessed that the export-only exception carries the risk of gradually expanding into broader liberalisation of the online retail sector.
The think tank's analysis noted that once foreign-funded platforms are permitted to own and manage inventory in India for exports, separating that inventory operationally and administratively from domestic sales will be difficult to monitor and enforce in practice.
The assessment flagged this as a potential pressure point for further opening of inventory-based B2C e-commerce to FDI, which has so far been kept closed to protect small and medium retailers.
FDI Policy in E-Commerce: Marketplace vs Inventory-Based Model
India's Consolidated FDI Policy, administered by the Department for Promotion of Industry and Internal Trade (DPIIT), draws a sharp line between the marketplace model (a technology platform connecting buyers and sellers, without owning inventory) and the inventory-based model (the entity owns the goods and sells directly to consumers). 100% FDI under the automatic route has been permitted in the marketplace model and in B2B e-commerce, while FDI in inventory-based B2C e-commerce has remained prohibited to prevent large foreign-funded platforms from undercutting small retailers through deep discounting.
Key Details
- Press Note 2 (2018 Series), effective 1 February 2019, tightened the rules further: a marketplace entity is deemed to indirectly "control" a seller's inventory (and thus behave like an inventory-based model) if 25% or more of that seller's purchases come from the platform or its group companies — such sellers are barred from listing.
- The new carve-out permits FDI-funded inventory ownership only where the goods are exported, not sold domestically, and are manufactured/produced in India.
- This is a narrow, export-specific exception, not a change to the general marketplace-vs-inventory framework governing domestic e-commerce.
The think tank's concern centres on exactly this boundary — that permitting foreign-funded inventory control for exports normalises a practice the FDI policy has otherwise treated as high-risk for domestic retail, creating pressure to extend it.
Rationale for Restricting FDI in Retail — Protecting Small Traders
India's calibrated FDI regime in retail (100% automatic-route FDI in single-brand retail; 51% government-route FDI with conditions in multi-brand retail; a closed door for inventory-based B2C e-commerce) exists specifically to protect the unorganised retail sector — small kirana stores and traders — which employs a very large share of India's retail workforce and could be displaced by capital-intensive, deep-discounting foreign-funded platforms if unrestricted FDI were allowed in inventory-led online retail.
Key Details
- Multi-Brand Retail Trading (MBRT): 51% FDI via government approval route, with conditions including minimum investment and 30% local sourcing.
- Single-Brand Retail Trading (SBRT): 100% FDI via automatic route, with local sourcing norms relaxed since 2018.
- Inventory-based e-commerce for domestic B2C sale: FDI remains prohibited as a distinct, more restrictive category, precisely to prevent circumvention of MBRT conditions through online channels.
The think tank's caution is that an export carve-out, if not tightly ring-fenced, could become a backdoor route around these very safeguards — the same concern that has historically shaped India's cautious, calibrated approach to retail FDI.
Consumer Protection (E-Commerce) Rules, 2020
Enforcement of the marketplace-vs-inventory distinction on the ground is governed by the Consumer Protection (E-Commerce) Rules, 2020, notified under the Consumer Protection Act, 2019. These rules recognise the same two categories — marketplace entities and inventory entities — and impose separate obligations on each (e.g., marketplace entities cannot list associated enterprises as sellers in a manner that gives them unfair advantage, and are subject to restrictions on "back-to-back" or engineered flash sales that limit consumer choice).
Key Details
- Administered by the Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution.
- Marketplace entities have fallback liability for non-delivery of goods/services by a listed seller.
- The rules operationalise the same marketplace/inventory boundary that FDI policy relies on — making effective enforcement of that boundary central to whether the new export exception stays contained.
The monitoring and ring-fencing challenge the think tank flagged is, in practice, a question of whether these consumer-protection rules and FDI compliance mechanisms can reliably keep export inventory and domestic inventory operationally separate.
- New exception: FDI permitted in inventory-based e-commerce only for export of goods manufactured/produced in India; domestic B2C sale via this route remains prohibited.
- Marketplace model / B2B e-commerce: 100% FDI under automatic route (unchanged).
- Press Note 2 (2018 Series): effective 1 February 2019, introduced the 25% purchase-control test for deemed inventory control.
- MBRT: 51% FDI, government route, 30% local sourcing condition; SBRT: 100% FDI, automatic route.
- Enforcement framework: Consumer Protection (E-Commerce) Rules, 2020, under the Consumer Protection Act, 2019.