Unshackle Indian retail e-commerce

Regulating the retail business in India is messy. State governments directly regulate trade and commerce within a state, whereas the Union government can intervene by legislating for specific products in public interest. The Union law prevails over commercial and industrial monopolies, combines, and trusts.

The politics of retail

Inter-governmental turf issues have dominated, since 2011, around the emotive issue of Foreign Direct Investment (FDI) in bricks and mortar retail. The Bharatiya Janata Party (BJP), then in opposition, was vehemently opposed, as were the Left parties and the Trinamool Congress, apprehending that the 12 million Indian retailers—mostly small and family managed—would be unable to compete with large foreign chains.

Large Indian-owned, organised retail chains have existed since the 1990s. But they were city centric with a market share between 2 to 4 percent. Politically, trade and commerce entities are supporters of the BJP. The Left was traditionally wary of capitalistic colonialism. So, political economy compulsions dictated spirited opposition to the entry of foreign, commercial Goliaths.

Interestingly, even as debate raged in the Parliament, two separate sets of graduates from IIT, Delhi quietly founded e-commerce start-ups—Flipkart in 2007 and Snapdeal in 2010. Both grew exponentially on the back of foreign venture capital funds. The message was clear to overseas investors: We want your money. But e-retail ownership must remain Indian.

Liberalising FDI in retail

By end 2012, with the economy slowing and the 2014 national elections looming, kick-starting growth and “good” jobs via FDI inflows in “bricks and mortar” retail, proved irresistible. The government approved 100 percent FDI in wholesale trade and 51 percent FDI in multi brand with added constraints like prior state government approval, prohibitions on stores outside the big cities to protect small retail, and compulsory 30 percent purchase from small manufacturers/suppliers.

Since 2015, the BJP-led Union government, has balanced the perceived political economy trade-off between rapidly growing e-commerce and protection for low productivity retail livelihoods by limiting the business opportunities in FDI-funded, multi-brand, retail e-commerce. In practice, however, business arrangements, like shell companies, to circumvent the onerous regulatory requirements of “Platform Neutrality” were ignored.

Differential regulation—Foreign versus domestic

Under pressure from small retail, in 2018, government formally segregated “multi brand e-retail into two separate entities. “Inventory-based e-commerce” platforms which also sell and distribute their own products, are allowed only under Indian ownership. This suits large Indian corporates. 100 percent FDI is permitted in “e-commerce marketplace” platforms, which cannot have a controlling interest or “common group ownership,” in suppliers on their platform, lest they be tempted to discriminate in favour of their own “private labels” or “preferential suppliers”.

CAIT pushes for platform neutrality and non-discriminatory e-marketplace governance

The Confederation of All India Traders (CAIT)—a registered advocacy entity, founded in 1999, but more visible under the Narendra Modi-led BJP government at the national level—claims the support of one-half of all retail traders. In mid-March this year, CAIT petitioned that (a) platform neutrality must be deepened; (b) a specialised e-commerce regulator creator be instituted; (c) a “sunset clause” on FDI imposed (to avoid “capital dumping”) although the consequential impact on FDI inflows were not reviewed; (d) compulsory GST registration for e-commerce participants be abolished to encourage small retailers onto e-commerce platform; (e) a ban on “preferential suppliers”; (f) a ban on the practice of “deep discounting”; (g) assured access for suppliers to customer data or alternatively, a ban on the platform also using such data; (h) strict enforcement of non-discrimination across suppliers; and (i) the creation of a unified Cyber Regulatory Authority.

On the issue of misuse by an e-commerce platform operator of its control over data, the configuring of search results and privileging some suppliers over others, the Competition Commission of India (CCI) observes that “…vertical integration (the use of private labels, common ownership structures) may create an incentive to improve the platform’s own/related entity’s market position relative to its competitors by engaging in preferential treatment on the platform”.

Such nexus surely could exist. But the relevant regulatory issue is whether it factually results in malice, discrimination, or harm to any other supplier or to consumer interest or whether it is merely an attempt to enhance group profitability by backward and forward integration. More generally, discrimination across customers and suppliers is acceptable business practice, so long as it is practiced transparently and fairly.

Unreasonable discrimination across customers and suppliers is best dealt with through careful, continuous monitoring and prompt regulatory action. It is inefficiently intrusive to design the regulatory architecture for zero malpractice. The CCI also recommends self-regulation by the industry along with recourse to the Commission’s services wherever anti-competitive behaviour becomes known.

If the best brands are to be attracted for managing e-commerce marketplaces, throttling opportunities to make a profit through forward and backward business linkages, will need to be compensated through higher fees paid by platform participants or by tapping other business opportunities. One such business opportunity is the use of data being generated on the platform.

Draft policy on E-commerce

The government published a Draft National E-commerce Policy on 23 February 2019. Para 4.2 suggests protecting small retailers from the high rates charged for e-advertisements. This implies that e-platforms (social and commercial) should use their revenue from fees, advertisements, and data capture to subsidise small retailer advertising—an intrusive, top-down enforcement, of quasi-ESG commitments for large corporates. Is this an optimum option? Consider that the same impact can be achieved by the government by simply negotiating lower, bulk advertisement rates and allocating space to small retailers.

Para 4.8 fingers “data effect” and “network effect” for making “selling at a loss” sustainable for big enterprises but unimaginable for small retailers with low access to capital. Undoubtedly, the easy flow of cheap, international capital, buoyed by the prospects of technology driven, high growth, in a globalised, open-economy ecosystem, is the primary driver behind this new business model. But rulemaking to constrain such booms are self-defeating, forcing the domestic economy to miss riding the tailwinds of global high growth.

Para 4.7 even suggests that mergers and acquisitions should not be permitted to maintain competition—a matter squarely within the mandate of the CCI, which has managed the growth of e-commerce prudently. Flipkart grew on the back of venture capital funding from 2007 to 2018 till Walmart—the American departmental stores to grocery hypermarket giant—acquired a majority share for US $16 billion. Snapdeal, founded in 2010 and now a public company, hopes to list soon. It competes with Flipkart and deep-pocketed Amazon, even as Reliance Retail is mounting a challenge by acquiring the Future Retail business.

Para 4.13 proposes “infant industry” status for small retailers. Sadly, the poor record of India’s Micro, Small and Medium Enterprises (MSME) policy cautions against providing support sans reciprocal productivity commitments from the recipient.

New e-commerce rules

The E-commerce Rules 2020 are comprehensive. In the case of marketplace e-platforms, Rule 4(11) (a) bars price manipulation (b) bars discrimination between consumers of the same class and arbitrary classification of consumers. Rule 5 (4) requires that contracts with suppliers describe the basis on which the platform could discriminate between goods and services or between suppliers within the same category, thereby, binding e-marketplace platforms to provide predictable, fair, and equitable service to suppliers and customers.

Light at the end of the tunnel

The preconditions for growing e-commerce exist. India scores high on banking inclusion and the reliability of package delivery. However, internet usage remains low, hampered by digital illiteracy, connectivity gaps, and access quality. Compared to a global average of 23 percent of people shopping online, the average share is a low 5 percent in lower-middle income countries, like India but 16 percent in upper middle-income countries, like China and 53 percent, in high-income countries.

Retail e-commerce in India is a success story with transaction valuations growing at nearly double the nominal rate of economic growth. Steady increase in the share of electronic sale/purchase in total retail sales, from less than 2 percent in 2012 to between 6 to 8 percent by 2020 and expectations of reaching 20 percent between 2026 to 2030, illustrate that the regulatory architecture is broadly appropriate.

Retaining the focus on growing e-commerce requires a nuanced appreciation of the market efficiency versus equity tradeoff. The primary public duty of large e-commerce entities is to enhance productivity and growth, whilst government can use the ensuing additional tax revenue to enlarge the ecosystem of retailers in e-commerce.

One such initiative has borne fruit. In 2021, government notified a nine-member, star-studded Advisory Council to conceive an Open Network for Digital Commerce—an open-source, privately financed and managed, not-for-profit network for e-commerce, based on good practice governance norms. The intention was to unify the retail e-commerce community spanning traders, service providers, and platforms. A great idea in theory. Sadly, the recent resignation of Praveen Khandelwal, Secretary General CAIT from the Council, shows that power sharing is seen as co-habitation with the Goliaths—anathema for those defending the Davids. German trade unions and Chinese Party representatives would be perplexed at this narrow view.

This opinion piece first appeared in orfonline.org on March 28, 2022 https://www.orfonline.org/expert-speak/unshackle-indian-retail-e-commerce/

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