E-commerce in India: Marketplace vs Inventory

How Indian rules allow foreign-funded e-commerce firms to run only marketplaces, not sell their own inventory, and why these rules were designed to protect small traders.

Online shopping in India has grown into a major part of retail, led by platforms such as Flipkart, owned by Walmart, and Amazon. But Indian rules shape how these companies can operate.

Two business models

Inventory model: the company buys goods and sells them directly to customers, like a traditional retailer.
Marketplace model: the company provides a platform where independent sellers list and sell goods, and the platform earns commissions and fees.

The FDI rules

India allows 100 percent foreign direct investment in e-commerce marketplaces, but does not allow FDI in the inventory model for e-commerce. So foreign-funded platforms like Amazon and Flipkart can operate only as marketplaces.

In 2018, India tightened the rules further:

Marketplaces can’t sell products from companies in which they hold an equity stake.
They can’t enforce exclusive deals with sellers.
They must treat sellers fairly and without discrimination.

Why these rules?

The rules aim to protect small traders and offline retailers from giant, well-funded foreign retailers that might use deep discounts to dominate. Traders’ associations have argued that big platforms still favour certain large sellers and use predatory pricing.

Competition cases

The Competition Commission of India investigated Amazon and Flipkart over allegations of favouring certain sellers, exclusive phone launches and deep discounting.

Growth

Despite restrictions, e-commerce grew rapidly, especially in smaller cities, helped by cheap smartphones, UPI and cash-on-delivery options. ONDC, a government-backed open network, aims to let small sellers reach buyers across many apps.

The debate

Supporters of the rules: protect livelihoods of millions of traders.
Critics: rules are complex, limit investment and consumer benefits, and are hard to enforce.

The phone launch

A new smartphone launches exclusively on one platform with big discounts. Offline shopkeepers complain they can't compete, and traders' associations file complaints alleging preferential treatment. Rules against exclusive deals aim to address such concerns.

Thinking Amazon and Flipkart sell most products themselves in India

Under Indian FDI rules, they operate as marketplaces where independent sellers list products.

Key takeaways

E-commerce firms can use inventory or marketplace models.
India allows FDI in marketplaces but not in the inventory model.
2018 rules barred selling products from firms in which platforms hold equity and exclusive deals.
The rules aim to protect small traders but are debated.