Clicks of the future

Addressing a conference of the Confederation of All-India Traders last Thursday, Gujarat Chief Minister Narendra Modi said that the "trading community should not run away from global challenges…they should not think they will die if businesses go online." The government, he added, "should not look to curb online trade". Mr Modi's statement is correct. Online shopping is here to stay, and will only grow larger. It is also correct that the government should not stand in the way of allowing the presence of foreign investors in this market; the benefit to consumers will be immense. While the United Progressive Alliance government has liberalised aspects of foreign direct investment in multi-brand retail, the barriers to entry for foreign players in e-commerce continue to be high. This is a problem that needs addressing.

At present, global online retail companies like Amazon exist in India on the "marketplace" model - they serve only to connect buyers and sellers. In other words, the massive benefits reaped by centralised inventory control, available in other markets, are denied to the Indian consumer. Both offline and domestic online retailers are terrified of liberalisation of this sector - unsurprisingly. What is less understandable is the government's weak-kneed agreement with their demands. Bricks-and-mortar trading companies are of course concerned that their margins might be hit with increased competition. But refusing to recognise the pace and compulsion of technological progress is not an answer. In fact, denial will only make big players irrelevant sooner. Even from the point of view of their own businesses, there is considerable complementarity between online and offline retail - people like to check out what they buy; it enables chains to manage their stocks effectively, offering instantly to send a desired item to a customer's house even if it is unavailable in the store that they have gone to. Both types of retail can, in fact, grow at the same time.

Meanwhile, those who have in fact profited from technical change are trying to prevent India's consumers from reaping the full benefits of the change. Some of the largest players in India's e-commerce landscape are trying to prevent global competition from entering, although these domestic incumbents already have a large first-mover advantage. In fact, they themselves have access to foreign funds through private equity investors, and many of them have taken advantage of this fact. But, even so, foreign investment in actual enterprises without Indian management is being argued to be restrictive of entrepreneurial development. This is not true - in fact, if anything, entrepreneurship is encouraged by more competition. Companies such as Flipkart have been doubtful about enlarging the market. The government cannot afford to listen to them forever.

It is important to remember how necessary retail reform is not just for consumers, but also for producers. Currently, small and medium enterprises in India that produce goods find it difficult to scale up. This is partly caused by restrictive environmental, tax and labour regulation. But it is also a product of a market that is fragmented, and an inability to reach enough consumers. Relying on traditional retailers takes time; the barriers to entry are much higher, as is the cost of marketing. Online, on the other hand, is much easier to create networks even for smaller businesses; the nature of what they're offering, and the price, can be compared with existing products with greater ease. In other words, it isn't just retail entrepreneurs that the government should think about when it comes to online reform; it's all entrepreneurs. Liberalisation of online retail is overdue.