Modi Government Wraps e-Commerce in Red Tape

Although India's right-wing Bharatiya Janata Party government has agreed to allow 100 percent foreign direct investment in the e-commerce market, theoretically allowing in such giants as Amazon and Alibaba, it has placed so many restrictions in the path of the retailing giants that it is unlikely they will have much of an impact.

Prime Minister Narendra Modi announced the liberalization on March 29, on the eve of his latest trip to the United States, presumably to score points with President Barack Obama and the US’s e-commerce players including Amazon and Flipkart – and China’s Alibaba – theoretically allowing them to establish an online marketplace where they can legally hawk their products.

The government has placed three restrictions on the marketplace platforms: they can’t offer discounts, one vendor’s share of the volume of trade on the marketplace cannot exceed 25 percent, and post-sales delivery and customer satisfaction will be the responsibility of the seller.

However, e-com companies are stumped by the clause that states that "no single merchant can sell more than 25 percent of goods sold on the websites." India’s Department of Industrial Policy and Promotion has also said that FDI will not be allowed for companies which themselves own the inventory.

The government intends to prevent e-com companies from influencing prices of products, but it will actually hit customers most. This is because the bigger retail sites, such as Flipkart and Amazon, have their own subsidiaries who are their biggest vendors. For instance, Flipkart's biggest vendor is WS Retail, which sells way more than just 25 percent of the total goods. This allowed e-com companies to offer huge discounts as they were guaranteed a certain volume of sales which would help them cover any loss from the lower prices.

But, while more vendors selling the same goods will mean more competitive prices, it puts an end to all the heavy and attractive discounts offered by e-commerce companies. The move has expectedly been welcomed by brick-and-mortar retailers.

Analysts say that the restrictions have complicated rather than simplified the country's already labyrinthine rules governing e-retail. They will also pose practical difficulties in enforcing the new rules.

"Far from attracting FDI in the sector, the new norms will likely deter the existing players from expanding as well as potential ones from entering the fray," said IT consultant Pratik Raheja, the former Joint Secretary Ministry of Telecommunications. "The new regime will increase bureaucratese, forcing firms to bypass regulations and encourage rent-seeking."

True reform, say experts, would have come only if the government had opened up all of organized retail, offline and online, to 100 percent FDI, which is clearly not the case here. Instead, top online retailers – Flipkart and Amazon – are trying to figure out how they can best maneuver the new situation without impacting their businesses. The going will now be rocky for them as new rules mandate that ecommerce companies "cannot directly or indirectly influence the sale price of goods" using coupons and cash backs.

"Online retailers rely heavily on luring customers with deep discounts," said Vivek Bhatnagar, head of domestic e-retailer Homeshop 18. "So the new directives will hit them hard. Instead of removing illogical rules which limit Indian retail’s ability to raise foreign capital, the government is choking the dynamism of online retail marketplaces by prohibiting online retailers from offering discounts or even guarantees on merchandise. Both they and the consumers will be losers in the new scenario."

The new system seems burdened with challenges that make it incumbent upon the government to monitor indirect discounting – a new level of bureaucracy – as the products now are legally sold by multiple vendors. Also, add some, the new guidelines will make the business environment more restrictive.

"The new regime represents the victory of protectionism over liberalisation,” Bhatnagar said. “This is not reform that enriches the economy and empowers the consumer as it should. This will only result in domination of a powerful lobby, essentially offline retail."

What the government has done, say e-retailers, is just formalize the foreign investment in e-commerce while continuing to bar these companies to sell directly to the consumer. Moreover, e-commerce companies have already been operating under the marketplace model and most of them have significant foreign investment anyway. So where's the novelty for us, they ask.

"The new norms are old wine in a new bottle," said Vaibhav Patil, Marketing Manager for Reliance Fresh, an online grocery shopping site. "The big change on the policy front would've been to allow FDI in the inventory model which would have created a level playing field for the big players to keep operating as a platform as well as selling directly to the consumers. But clearly this hasn't transpired."

Experts say there was no need for the government to resort to protectionist moves because just as unorganized retail survives the presence of organized brick-and-mortar retail, the latter can grapple with all kinds of e-commerce challenges by working through them organically. Policy should enable and not hinder such competitive evolution, they add.

"The announcement does bring about a much-needed clarity on FDI policy, specifically to the contentious marketplace model," said a senior official at Jabong, an online clothing portal. "This is foundational for all other regulations and laws and will provide clarity on tax provisions for the sector."

Supporters of the new guidelines add that the new regulations will give ecommerce firms like China's Baidu and Tencent, and Japanese internet giants like Rakuten and Recruit Holdings, clarity on investing in Indian ecommerce. Alibaba Group, already a significant investor in electronic payments and marketplace Paytm, recently declared it was keen to begin operations directly in India this year.

E-commerce has perhaps been the most dynamic aspect of India’s economy in the recent past. Start-ups incubated by young entrepreneurs have inventively sidestepped stifling regulations to create a vibrant ecosystem which attracts billions of dollars of foreign investment. This has greatly benefitted the economy as well as the Indian consumer. India's e-commerce market has also seen exponential growth in the last five years and is expected to touch US$69 billion by 2020.

However, by micromanaging the sector, which has spawned millions of jobs and spurred economic growth, the government now seems set to create a stifling policy framework that just might choke its growth.