The Indian government has proposed relaxation of its long-standing restrictions on foreign investment in e-commerce, a move that is expected to pave the way for a wider opening of India's online retail sector.
Through a Press Note issued on July 23, the Department for Promotion of Industry and Internal Trade (DPIIT) has proposed allowing foreign-funded e-commerce companies to own inventory, and sell products directly for exports.
The change will take effect after corresponding amendments are made to the Foreign Exchange Management (Non-Debt Instruments) Rules through a FEMA notification, GTRI said in a report. The proposal allows foreign-invested e-commerce companies to operate an inventory-based model for exports of goods manufactured or produced in India. Until now, foreign-funded e-commerce firms were allowed to operate only as marketplaces, where they connected buyers and sellers without owning the products. The new policy allows them to purchase, store and export goods directly from their own inventory.
Why India Banned the Inventory Model
Under the marketplace model, the platform acts only as a digital intermediary, earning commissions while independent sellers own the goods. Under the inventory model, the platform owns the goods and sells them directly like an online retailer, giving it greater control over pricing, sourcing and suppliers.
India had permitted 100% FDI in the marketplace model, but prohibited foreign investment in the inventory model because it would effectively allow foreign companies to enter multi-brand retail, a sector where FDI has remained tightly restricted, GTRI said. The ban was primarily introduced to protect small retailers. Over the years, the government repeatedly tightened the rules after allegations that some foreign marketplaces were indirectly controlling inventory through affiliated sellers.
Narrow Export Exception
According to GTRI, the proposal marks the first major breach in India's long-standing ban on foreign-funded inventory-based e-commerce and fulfils a demand that multinational platforms have pursued for years. Although the relaxation is limited to exports of goods manufactured in India, it sets an important policy precedent. Once foreign-funded platforms are allowed to own and manage inventory in India, pressure is likely to grow to extend the same model to domestic sales.
In practice, maintaining separate inventories for exports and domestic sales will be difficult to monitor, GTRI said. The export-only exception could, therefore, become a stepping stone towards full-scale inventory-based e-commerce under FDI.
Effect on Small Traders
While the proposal is limited to exports, the larger concern is the direction of policy for future demands will seek permission for inventory-based domestic sales, followed by approval to sell all products—including imported goods—through the same model.
This could adversely affect small traders and MSMEs. Under the inventory model, the platform becomes the seller and gains significant bargaining power over suppliers. Small manufacturers and traders may be forced to sell to the platform's inventory arm at lower margins rather than directly to consumers through the marketplace. Over time, independent sellers could lose visibility, bargaining power and customers, making them increasingly dependent on the platform.
Long-Term Risk
If future governments remove the remaining restrictions, foreign e-commerce companies could import products—including large volumes from countries such as China—and sell them directly from their own inventories in India. That would change India's e-commerce model, effectively open the door to foreign-owned multi-brand online retail, and weaken the position of millions of small traders and MSMEs, GRTI said.
The government should introduce strong safeguards to ensure that the export-only relaxation is not misused or gradually extended into domestic retail.
- The policy should require complete physical and digital separation of export and domestic inventories, with separate warehouses, stock records and audit trails.
- Foreign-funded platforms should be required to report inventory movement, shipments and seller linkages in real time to regulators.
- The rules should prohibit self-preferencing in search results, product rankings, advertising and buy-box placement, and ensure that export-related incentives are transparently passed on to MSME sellers.
- There should also be strict penalties for diversion of inventory to the domestic market, misreporting or related-party routing, along with a sunset clause requiring an independent review after a fixed trial period before the policy is continued or expanded.
The bigger challenge is not designing guardrails, but enforcing them. India has often announced well-intentioned regulatory safeguards, but monitoring compliance by large digital platforms has proved difficult. Regulatory incentives are frequently misaligned with the national objective of promoting exports while protecting MSMEs and ensuring fair competition. Without credible enforcement, even the strongest guardrails may remain only on paper, increasing the risk that an export-only relaxation gradually evolves into unrestricted inventory-based e-commerce.
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