The Narendra Modi-led NDA government has just tweaked rules governing India’s up and coming electronic commerce industry, triggering a global outrage as the updated regulations apparently place strong curbs on operations of global e-tailers such as Amazon and Walmart (which now controls Flipkart). Under the new regime, e-commerce companies in India will not be allowed to sell products from entities they have invested in or have any form of equity interest. The new rules will come into effect from February 1, 2019.
The new regulations lead on the Centre’s existing foreign direct investment (FDI) rules for the e-commerce sector, where 100% FDI under the so-called automatic route was permitted in the marketplace model, but not in inventory-based model. For starters, under the automatic route, a foreign investor — say Amazon — or an Indian company — say SnapDeal — does not need any approval from the central bank, the RBI, for the investment. Generally, if you have to bring in foreign capital investment to the country, you must obtain the approval of the watchdog agency, the Foreign Investment Promotion Board or the FIPB. Indian rules define the marketplace model of e-commerce as one where the company merely offers an IT platform to act as a facilitator between buyers and sellers. The inventory model is where inventory of goods and services is owned by the e-tailer and is sold to consumers directly.
FDI to India’s e-commerce sector — which currently has a valuation of $30-35 billion and is expected to grow over 50% year-on-year to reach $120 billion in size in about five years from now, according to more than one estimations and consultancy reports — has been burgeoning with online commerce giants investing big time in the industry here. Amazon, owned by billionaire Jeff Bezos, has already invested nearly $5 billion (more than Rs 35,000 crore) in its India business of which about $300 million (Rs 2,200 crore) came just in December, a move market experts interpreted as a part of the giant’s plans to take on rival Walmart, which picked up a 77% stake in Flipkart in May this year for a whopping $16 billion. The Walmart-Flipkart deal is India’s largest acquisition and the world’s biggest e-commerce buy. Now Flipkart is valued at about $22 billion.
It is at this critical juncture the new rules have hit the country’s e-commerce industry, which holds immense potential for growth in the coming years. An analysis from Barclays suggests Amazon is looking at $11.2 billion in total goods sold this financial year (by March 2019) and this target would make India its most important market outside North America. Walmart also has big plans for Flipkart and its overall Indian operations. Paytm Mall, which is controlled by Chinese e-commerce giant Alibaba, is another significant player in the online marketplace model.
Now, all these players will be forced to abandon selling many marquee products, such as the popular smart speakers Echo Dot, which is developed and sold by Amazon. Cloudtail India, a popular seller on Amazon’s platform, is a company that is controlled by Amazon and under the new rules unless Amazon sells its stakes in the seller, it won’t be allowed to sell Amazon’s products. It is a fact that most e-commerce companies such as Flipkart or Amazon primarily pool in goods from sellers that they have some stake in them so that the exchanges between them would be more transparent and accountable. Anecdotal evidence suggest that users are fond of such sellers, if the popularity and track record of Cloudtail India on Amazon India’s platform is any indication. Cloudtail, the largest seller on Amazon India, is a partnership between Amazon Inc and Infosys co-founder NR Narayana Murthy’s Catamaran Ventures. Last fiscal, it clocked 27% growth in revenue.
It is highly unlikely that companies such as Amazon would do a harakiri with such sellers and that’s why the business and legal rationale behind the Modi government’s new rules become really hazy. Also, the new regulation looks like an attempt from the state to micromanage an industry that has been finding its own rhythm after a few years of bumpy rides and a cacophony of regulations. A series of startups have come up banking on the current wave of growth in this industry and many more are planning to build solutions that would help enhance capabilities in the sector. In this scenario, any more to bring in a differential treatment to the industry, however desi it sounds, could send alarming signals to the investors community, domestic and abroad, and could jeopardise the grand plans of global players, which would not augur well for the growth of the Indian e-commerce industry.
In fact, India’s e-commerce sector has seen several such regulatory flip-flops in the past few years. Just two years ago, Amazon and Flipkart had to amend their structures when the industry department capped a single seller’s contribution to 25% of the platforms overall business. But the current rules come at a time when growth is throbbing and the industry witnesses a strong trend towards the much-needed consolidation. The only rationale industry pundits can cite to explain the government move is the BJP government’s attempt to woo in its traditional vote base of traders, especially local retail players, both organised and unorganised, in the context of the latest electoral debacle the ruling NDA met with in the Hindi-belt following the Assembly elections. Considering that there is a general consensus in the industry and business community and even a segment of the NDA sympathisers that the government’s much touted economic experiments such as the hasty implementation of the Goods and Services Tax and the November 2016 ban of high value notes (demonetisation) have broken the back of traders in the country, it is natural that the government would go the extra mile in appeasing its voter base and the updated e-commerce rules could be one of the aces up its sleeve.
Still, the move fails to make economic sense as the middle class consumers would find it hard to part with their pet sellers and products and that e-commerce will once again stare at a phase of confusion and chaos and will only end up exposing the chinks in India’s FDI plans. The move can also be dubbed as a doublespeak from an emerging economy that aspire to become an economic superpower by harnessing its free-market, where unfortunately not everyone meets the same yardstick and competition is choreographed to the whims and fancies of an ambivalent regime.