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Q96 (IAS/2022) Economy › Industry, Infrastructure & Investment › Foreign direct investment Official Key

With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct ? 1. They can sell their own goods in addition to offering their platforms as market-places. 2. The degree to which they can own big sellers on their platforms is limited. Select the correct answer using the code given below :

Result
Your answer: —  ·  Correct: D
Explanation

The correct answer is Option 4 (Neither 1 nor 2) based on the Foreign Direct Investment (FDI) policy guidelines issued by the Department for Promotion of Industry and Internal Trade (DPIIT).

  • Statement 1 is incorrect: Under current consolidated FDI policy, 100% FDI is permitted in the marketplace model of e-commerce, but prohibited in the inventory-based model. This means foreign-owned platforms function strictly as facilitators between buyers and sellers and are expressly forbidden from selling their own goods or exercising ownership over the inventory sold on their platforms.
  • Statement 2 is incorrect: The regulations are absolute rather than a matter of degree. An entity having equity participation by the e-commerce marketplace entity (or its group companies) is prohibited from selling its products on the platform run by such marketplace entity. There is no "limited degree" allowed; if a marketplace has an equity stake in a seller, that seller cannot operate on its platform.

Since both statements misrepresent the restrictive nature of India's e-commerce FDI norms, Option 4 is the right choice.

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PROVENANCE & STUDY PATTERN
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct ? 1. They can sell …
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10

This is a textbook 'Static Economy' question masquerading as Current Affairs. The rules for FDI in e-commerce are standard static topics covered in every major economy book (Vivek Singh, Ramesh Singh). If you are reading daily news articles but skipping the 'FDI in Retail' chapter of your base book, you are studying backwards.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Under India's FDI and e-commerce regulations, are foreign-owned e-commerce firms operating in India allowed to sell their own goods (operate as inventory-based sellers) in addition to operating marketplaces?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 243
Presence: 5/5
“E-commerce companies can operate under two different models in India. • The first is the marketplace model where the e-commerce firm simply acts as a platform that connects buyers and sellers. 100% FDI is allowed in e-commerce companies in this model.• The second model is inventory-based where the inventory of goods sold on the portal is owned or controlled by the e-commerce company. FDI is not allowed under this model.”
Why this source?
  • Defines two e‑commerce models: marketplace (platform connecting buyers and sellers) and inventory‑based (inventory owned/controlled by the e‑commerce company).
  • States 100% FDI is allowed for marketplace model but FDI is not allowed for inventory‑based model.
  • Directly distinguishes that foreign investment is permitted only in the marketplace model, not where the firm owns inventory.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 244
Presence: 5/5
“What was happening earlier was that large e-commerce companies such as Amazon and Flipkart, while not owning inventory themselves, were providing a platform for their group companies such as CloudTail and WS Retail respectively. This was skewing the playing field, especially if these vendors enjoyed special incentives from the e-commerce firm, over others. These controlled or owned vendors may then be able to offer discounts to customers that competitors may not be able to match. Hence, Government in Dec 2019, made the following clarifications/changes in the FDI policy in e-commerce: • 1. Vendors that have any stake owned by an e-commerce company cannot sell their products on that e-commerce company's portal.• 2.”
Why this source?
  • Describes earlier practice of e‑commerce firms routing sales through group vendors, creating an uneven playing field.
  • Records the Dec 2019 FDI policy clarification that vendors with any stake owned by an e‑commerce company cannot sell on that company's portal, blocking related inventory arrangements.
Statement 2
Under India's FDI and e-commerce regulations, are foreign-owned e-commerce marketplace firms operating in India restricted in the degree to which they can own or hold equity in large sellers on their platforms?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 244
Presence: 5/5
“What was happening earlier was that large e-commerce companies such as Amazon and Flipkart, while not owning inventory themselves, were providing a platform for their group companies such as CloudTail and WS Retail respectively. This was skewing the playing field, especially if these vendors enjoyed special incentives from the e-commerce firm, over others. These controlled or owned vendors may then be able to offer discounts to customers that competitors may not be able to match. Hence, Government in Dec 2019, made the following clarifications/changes in the FDI policy in e-commerce: • 1. Vendors that have any stake owned by an e-commerce company cannot sell their products on that e-commerce company's portal.• 2.”
Why this source?
  • Explicitly records the Dec 2019 clarification that vendors with any stake owned by an e-commerce company cannot sell on that company's portal.
  • Directly limits an e-commerce firm's ability to own or control vendors that operate on its marketplace, addressing ownership/equity in large sellers.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 243
Presence: 4/5
“E-commerce companies can operate under two different models in India. • The first is the marketplace model where the e-commerce firm simply acts as a platform that connects buyers and sellers. 100% FDI is allowed in e-commerce companies in this model.• The second model is inventory-based where the inventory of goods sold on the portal is owned or controlled by the e-commerce company. FDI is not allowed under this model.”
Why this source?
  • Distinguishes marketplace model (platform connecting buyers and sellers) from inventory model and notes FDI permissibility differs by model.
  • Provides context that marketplace firms can have 100% FDI but are regulated differently from inventory-based players, supporting the existence of ownership restrictions on vendors.
Pattern takeaway: UPSC Economy questions prioritize 'Regulatory Friction'. They focus on rules designed to protect domestic players (like Kirana stores) against foreign giants. Any rule that limits the power of a foreign entity (like Statement 2) is highly likely to be a real policy provision.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly lifted from standard texts like Vivek Singh (Ch 7, p. 243-244). No obscure reports needed.
  2. [THE CONCEPTUAL TRIGGER]: FDI Policy > Sectoral Caps & Conditions > Distinction between Marketplace vs. Inventory-based models.
  3. [THE HORIZONTAL EXPANSION]: Memorize the 'Retail Matrix': (1) Marketplace E-comm (100% FDI, Automatic); (2) Inventory E-comm (0% FDI); (3) Single Brand Retail (100% FDI, Automatic, 30% local sourcing if >51%); (4) Multi-Brand Retail (51% FDI, Govt Route, State approval required).
  4. [THE STRATEGIC METACOGNITION]: When studying FDI, ignore the boring percentage lists. Focus on the *Restrictions* and *Conditions* (e.g., 'cannot own inventory', 'local sourcing norms'). UPSC asks about the 'Handcuffs', not the 'Permission'.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Marketplace vs. inventory‑based e‑commerce models
💡 The insight

FDI permission differs by model: marketplace platforms can receive FDI while inventory‑based operations cannot.

High‑yield for regulatory questions on FDI and e‑commerce; connects foreign investment norms with sectoral operational models and helps answer questions on permissible business structures and investment routes.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 243
🔗 Anchor: "Under India's FDI and e-commerce regulations, are foreign-owned e-commerce firms..."
📌 Adjacent topic to master
S1
👉 Restrictions on group‑owned vendors and related‑party sales
💡 The insight

Policy bars vendors with any ownership stake by an e‑commerce company from selling on that company's portal, preventing firms from circumventing inventory restrictions.

Essential for questions on policy changes and market fairness; links to corporate governance, competition issues, and how regulatory clarifications modify commercial practices.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 244
🔗 Anchor: "Under India's FDI and e-commerce regulations, are foreign-owned e-commerce firms..."
📌 Adjacent topic to master
S1
👉 DPIIT as the policymaker for FDI rules
💡 The insight

The Department for Promotion of Industry and Internal Trade sets rules and issues FDI policy pronouncements for foreign investment.

Important for institutional questions on who frames FDI policy; connects to administrative responsibilities, inter‑ministerial roles, and procedural routes (automatic vs government approval) in investment policy.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 98
🔗 Anchor: "Under India's FDI and e-commerce regulations, are foreign-owned e-commerce firms..."
📌 Adjacent topic to master
S2
👉 Marketplace vs Inventory-based e-commerce FDI regime
💡 The insight

FDI treatment differs by e-commerce business model: marketplaces are permitted FDI while inventory-based models face prohibitions.

High-yield for policy questions on FDI and retail regulation; links to broader topics like foreign investment routes and sectoral caps. Mastering this helps answer questions on allowed business structures, regulatory intent, and distinctions in market access rules.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 243
🔗 Anchor: "Under India's FDI and e-commerce regulations, are foreign-owned e-commerce marke..."
📌 Adjacent topic to master
S2
👉 Prohibition on e-commerce firms owning stakes in marketplace vendors
💡 The insight

Regulation forbids vendors with any stake owned by the e-commerce company from selling on that company's portal, directly constraining ownership of large sellers.

Essential for questions on competition policy and FDI safeguards in digital markets; useful for analyzing anti-competitive arrangements, related-party transactions, and recent regulatory reforms in e-commerce.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > 7.12 FDI in Retail > p. 244
🔗 Anchor: "Under India's FDI and e-commerce regulations, are foreign-owned e-commerce marke..."
📌 Adjacent topic to master
S2
👉 Regulatory authority for FDI policy pronouncements
💡 The insight

The Department for Promotion of Industry and Internal Trade (DPIIT) sets rules and issues policy clarifications for foreign investment in India.

Useful for mapping who frames FDI rules and for essay/answer writing on institutional roles; connects to governance, economic policy implementation, and where to locate policy changes or clarifications.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.23 Foreign Investment > p. 98
🔗 Anchor: "Under India's FDI and e-commerce regulations, are foreign-owned e-commerce marke..."
🌑 The Hidden Trap

The '25% Sourcing Rule': An e-commerce marketplace entity is deemed to control the inventory of a vendor if more than 25% of that vendor's purchases are from the marketplace entity or its group companies. This is the specific metric for 'control' hinted at in Statement 2.

⚡ Elimination Cheat Code

Use 'Protectionist Logic': Indian economic policy is heavily tilted towards protecting small traders (Kiranas). If Statement 1 were true (foreign giants selling their own goods), they would wipe out small traders instantly. Therefore, Statement 1 must be false. Statement 2 restricts the giant's power, which aligns with the protectionist intent. Thus, 2 only.

🔗 Mains Connection

Mains GS3 (Inclusive Growth) & GS2 (Governance): Link this regulation to the 'ONDC (Open Network for Digital Commerce)' initiative. The restrictions in this question were the 'Stick' to curb monopolies; ONDC is the 'Carrot' to democratize digital commerce and empower small traders.

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