Politics Drives India’s Rules Curtailing E-Commerce

The Indian government's new e-commerce guidelines, a gamble aimed at curtailing the sales clout of multinationals like Amazon and the Wal-Mart-owned Flipkart while trying to mollify its 25 million vexed brick-and-mortar merchants in an election year, have received little traction from the latter.

The regulations, issued on Dec. 26, are a disappointing retreat from the ruling Bhartiya Janata Party’s stated aims of modernizing the country’s consumer marketplace. They potentially mean higher prices for millions of shoppers who are fast becoming adroit at on-line purchasing.

The BJP, however, fears the wrath of traditional merchants and their voting power in elections expected in April and May this year who have been hit hard by Prime Minister Narendra Modi’s precipitous 2016 demonetization and his 2017 goods and service tax. The party already took an unexpected hit in December 2018 elections in Madhya Pradesh, Chhattisgarh and Rajasthan, three key BJP-governed states in the Hindi heartland. It lost Mizoram in northeast India to a regional party and failed to make an impact in Telangana, which was separated from Andhra Pradesh in 2014.

How much the new restrictions mean in Modi’s mantra of modernizing India into a business-friendly economy is unsure if discouraging. They are emblematic of the country’s two-steps-forward, one-step-back attitude when it comes to seeking international investment. The international online vendors say the tightened restrictions will hamper FDI inflows and cut heavily into online retail growth, potentially a US$100 billion market by 2022 and deprive them of a level playing field. By contrast, China, which has taken to Internet shopping with a vengeance with government approval, saw Alibaba’s Nov. 11 Singles Day shopping spree rack up $30.8 billion in sales in a single day, more than twice the US’s Black Friday and Cyber Monday sales combined.

Specifically the new directives e-commerce firms from holding ownership positions in sellers on the platform, scupper their ability to offer discounts and prevent them from entering into exclusive deals of the kind that many have with popular mobile phone makers.

"An entity having equity participation by e-commerce marketplace entity or its group companies or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity,” according to a government notice.

The companies will also have to file certificates and auditor reports to the Reserve Bank of India, confirming compliance of guidelines by Sept. 30 of every year for the preceding fiscal.

The new regulations follow complaints from Indian retailers and traders that the e-commerce giants are leveraging their control over inventory from their affiliates to distort the marketplace and sell products at unfairly low prices.

"Low prices offered by the American-controlled behemoths and policy loopholes helped major e-commerce companies to offer heavy discounts and seize market share for goods such as electronic items," said a member of the All India Online Vendors Association.

In October, the association filed a petition with the anti-trust body Competition Commission of India alleging that Amazon favors merchants that it partly owns, such as Cloudtail and Appario. The lobby group filed a similar petition against Flipkart in May, alleging violation of competition rules through preferential treatment for select sellers.

The Confederation of All India Traders in a statement said that if the order is implemented in full then malpractice, predatory pricing policies and deep discounting by e-commerce players will no longer occur. In May, CAIT raised objections to Walmart's US$16 billion acquisition of Flipkart saying the deal would create unfair competition and result in predatory pricing.

Flipkart and Amazon are the two largest players in the booming Indian ecommerce sector. Over the past couple of years, the two firms have been forced to modify their legal structures because of FDI rules announced in March 2016 by the government which allowed FDI in online marketplaces even as it capped the contribution of a single seller to 25 percent of the marketplace’s overall business. Per the current policy, 100 percent FDI is permitted in marketplace e-commerce activities. It is prohibited in inventory-based activities.

However, some ecommerce companies support the government's move as they feel it will allow for organic trade while protecting the interests of small Indian traders.

“Snapdeal welcomes updates to FDI policy on e-commerce. Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce,” Kunal Bahl, co-founder of Snapdeal, one of the largest players in the sector, said in a tweet.

Many small traders are also of the view that the new rules are needed to correct the current skew in the market which big online retailers exploit to their advantage. "The new rules will help appease small traders and farmers who fear that US companies are making a back-door entry into India's retail market and could squeeze out small corner shops that dominate Indian retailing," said Amit Prakash, President, Committee of Wholesale Traders from Old Delhi.

Analysts, however, are unsure if the new guidelines will benefit millions of small Indian retailers, traditionally regarded as a robust vote bank for the right-wing Hindu BJP. The sector has been bruised by demonetization and the implementation of the unified Goods and Services Tax. The sector largely supported Modi in the 2014 general election.

The majority view is that the fresh directives – which were neither debated nor discussed in Parliament – reek of desperation to garner votes. The critics say standardizing rules for Big Retail, domestic and foreign, and online and offline which guarantee benefits to customers; fair value to producers and a transparent and competitive ecosystem is the need, not kneejerk policymaking.

"Rather than resort to ill-thought out moves which confuse foreign investors and amount to bad optics internationally, the government should reorient its policy on retail and online retail that has generally been confused and poorly implemented," said a south Delhi trader, Vikram Gupta.

Ushering predictability in a regulatory environment is all the more imperative given Union Commerce and Industries Minister Suresh Prabhu's ambition to bring in US$100 billion in FDI to India.

However, the way the BJP is going about achieving this aim leaves a lot to be desired. Perhaps after losing the five state elections, its fears about growing public disenchantment over its inability to bolster the economy and create millions of jobs are hampering its ability to think clearly.

Neeta Lal is a Delhi-based editor and journalist and a long-time contributor to Asia Sentinel.