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Exclusive: India likely to ease restrictions for foreign online retailers in July

By Nandita Bose and Rajesh Kumar Singh

MUMBAI/NEW DELHI (Reuters) - India could allow global online retailers such as Amazon.com Inc AMZN.O to sell their own products as early as next month, removing restrictions that have held back competition in one of the world's biggest, and most price-sensitive, retail markets.

The decision, likely to be announced in or alongside the budget, is one of the first tangible signs of economic reform by the business-friendly government of Prime Minister Narendra Modi, who was sworn in 10 days ago.

The move could allow the government to circumvent political opposition to opening up India's $500 billion retail sector to global retail giants such as Wal-Mart Stores Inc. WMT.N

Four people privy to discussions within the government told Reuters that officials believed a more robust online retail sector would spur manufacturing and consumption, helping revive an economy that has grown at below 5 percent for two years, the longest period of sub-par expansion since the late 1980s.

"Most stakeholders support FDI (foreign direct investment)," said a senior government official, referring to e-commerce. "We have pitched for opening it up completely."

The official, like others who spoke to Reuters on the move, declined to be named because the matter was confidential. When asked about the decision, a spokesman for India's commerce and industry ministry declined to comment.

Industry surveys say e-commerce could contribute up to 4 percent to India's economy by 2020 from under one percent now.

The proposal was put forward to Modi when he met top bureaucrats late Wednesday to brief them on his goal of streamlining government, one of the officials who attended the meeting told Reuters.

Although New Delhi has been discussing opening up the sector since last year, the sources said a decision was imminent.

"The way the government is initiating discussion, it is very clear that they are extremely serious about it," said an executive with a global online retailer who was invited to a meeting two weeks ago between the government and foreign and domestic companies.

"They understand this will help small traders to grow their business, expand and reach out to a larger market," he said. He also declined to be named, as the matter was confidential.

U.S. President Barack Obama has set a goal of quintupling bilateral trade with India to $500 billion, highlighting sectors like retail, defense, drugs and energy as areas where the U.S. administration is seeking greater access.

Two Indian newspapers reported on Thursday that Modi would meet Obama in Washington in September, where trade and investment are likely to be high on the agenda. [ID:L3N0OM0UU]

Modi's Bharatiya Janata Party (BJP) has been a vocal critic of the previous government's policy to allow foreign multi-brand retailers, but Modi has tried to reassure the politically influential small traders that stymied that decision about online retail.

"We should not worry about these things. Our children have taken IT to the world. We'll have to embrace it," he told a gathering of small traders in February while he was on the campaign trail.

Modi will eventually decide investment guidelines and the limits of foreign ownership in online retail, but the sources said the rules will be clearer than those the previous government put in place for foreign investment in the supermarket sector. That regulatory uncertainty had discouraged global chains from entering India.

For example, the policy will apply across the country, and will not be left at the discretion of individual states, they said. Companies, however, will be required to source products locally and invest in the supply chain.

An Amazon spokesperson in India said opening up the sector would be good for both consumers and Indian businesses, and spur infrastructure development. Peter Faricy, head of the company's global marketplaces, said India was a promising market.

"I can't speculate on what might happen going forward, but I can tell you that we're very pleased about the launch of the business so far out there," Faricy added.

Deepa Thomas, spokeswoman for eBay EBAY.O in India, said the e-tailer was also excited about the opportunity.

CONSUMPTION-LED GROWTH

The industry ministry that drafts FDI rules recently met officials from companies including Amazon, Google GOOGL.O, eBay Inc, Wal-Mart and Indian e-tailer Flipkart to finalize the investment guidelines, the people said.

Global online retailers like Amazon and eBay are currently banned from selling products they have sourced themselves, and must rely on third-party suppliers. Their platforms, which they own fully, are marketplaces for these outside suppliers.

The government is likely to end this ban, paving the way for global retailers to bring their formidable supply chain, and cheaper goods, into India, potentially boosting consumption and benefiting small manufacturers and traders.

Opening up the online retail business for foreign direct investment is also widely expected to eliminate middlemen, leading to lower transaction, overhead, inventory and labor costs, industry officials said.

Modi, who last month won the first outright parliamentary majority in three decades in Asia's third-largest economy, wants to kick start the sluggish economy by winning back domestic and foreign investor confidence.

Regulatory uncertainty under the previous government prevented foreign supermarket chains from setting up shop. So far, only Britain's Tesco PLC TSCO.L has announced an investment. In its election manifesto, the ruling BJP vowed to ban foreign supermarkets.

LIFELINE TO LOCAL ONLINE RETAILERS?

E-commerce is growing at the compound annual growth rate of 34 percent in India, according to a report from consultants Digital–Commerce, IAMAI-IMRB, but still lags other emerging nations, including China.

Online travel services currently account for over 70 percent of consumer e-commerce transactions. Online sales of retail goods were $1.6 billion last year, according to research firm Forrester. This figure is expected to will swell to $76 billion by 2021, according to consultancy Technopak.

By comparison, China's business and consumer e-commerce sales are projected to surpass $180 billion this year.

If approved, the policy will also provide access to much-needed capital to local online businesses like Flipkart, marketplace Snapdeal and fashion retailers Myntra and Jabong. All online retailers in India are losing money due to high advertising costs, heavy discounts and an underdeveloped logistics network.

Only 18 of the 52 e-commerce start-ups in India - which raised $700 million in venture capital funding in the three years ending 2012 - were able to raise follow-on investments last year, investment bank Allegro Advisors said.

Most Indian e-tailers are aggressively scaling up in an attempt to compete with Amazon, which slashed prices and improved delivery standards after entering India last year and is looking to acquire smaller retailers.

(Editing by Douglas Busvine, Miral Fahmy, Mike Collett-White and Ken Wills)

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