It has been more than a day now but, the effect of government’s recent announcement permitting 100% FDI in eCommerce trading is no way deteriorating. Though we have heard a decent amount of praises by various eCommerce professionals but, it’s more meaningful when we ponder upon the side effects of the notification.
Yes, the notion will open gates for foreign investments that will further lead to a better growth and expansion of these eCommerce firms but, at the same time it will leave these online retailers unarmed. E-commerce firms will not have any take on the pricing of the products sold by its merchants. So, in a way, we can call it an end of honeymoon period for the online sorority.
While eCommerce majors like Flipkart and Amazon that has been regularly grumbling upon FDI norms of the country are all mum since the circular is announced, it seems like it’s a celebration time for brick-and-mortar retailers as there will be no more lofty discounts on the cards. This promptly draws the attention towards a single question: Will customers still buy online, if they have to pay as much as at an offline store?
Industry expects are off the opinion that the quest for FDI is nothing but an attempt to open eCommerce sector to give backdoor entry to international brands in the country. Here are some of the after-effects of permitting 100 % FDI in e-Commerce and why it is a lose-lose scenario for Indian eRetailers:
No Interference in Product Pricing
It is clear that eCommerce companies with their massive foreign funding have the capability to purchase products in bulk and thus can lower the cost on the units they sell. At the moment these eCommerce companies are themselves going through a rough time because of the moaning loss and taking away this price decision making authority might end up wiping their root from the market.
Heavy Interest Rates
Companies like Amazon secure funding at a very minimal interest rate that is as low as 0.5 to 1 percent per annum. On the other hand, Indian eRetailers (who form part of non-incorporated sector in India) have no other option but, to rely upon NBFCs (Non-banking Finance Corporations). Here they end up paying an interest that is as high as 16-18 percent. Even if they manage to get loan from the bank, the ROI is between 8-10%. This is a huge difference in the interest rates with above mentioned point will add tons to the workout process.
This norm if goes as per said, rival eCommerce companies will surely end up slandering each other as they won’t be able to compete with new entries who could wait out the startups until they burn their wealth and then start hiking product prices. Well… in either way, conflicts is for sure!
With all the above mentioned factors, this announcement sounds way too perilous because of the impact it will have on merchants and eRetailers. Yes, the move will bring about a pricing stagnancy but, at what cost?