Competition in e-tail: Fair or unfair?

The e-commerce foreign direct investment policy doesn't sit well with the concept of competition

Little did we know one year ago that the heavens would actually fall upon us and the world would come to a virtual standstill. The novel coronavirus is still spreading like wildfire. When it started, the lockdown was imposed overnight. Embroiled in panic and uncertainty, everyone was queuing up outside stores to stock up the supplies. In such a situation, social distancing norms were hard to comply with. It caused tremendous inconvenience to consumers and increased the risk of virus infection. Local stores were also running out of stock of every essential item. The movie Contagion was the flavour of the day, like living a deja vu. Except one redeeming factor — we live in the times of e-commerce. The possibility of goods being delivered to our doorstep has been a life saver. While the e-commerce took away our existential worries to a great extent, their own have been exacerbated by the proposed e-commerce related foreign direct investment (FDI) policy revision, which will in turn have adverse impact on consumer interest.   

There are several issues concerning e-commerce but in these times of adversity, a wide array of products, including groceries, food, medicines, household and office supplies could be sourced online, making survival less difficult amid prolonged lockdowns and the constant need for social distancing.  Otherwise too, with the growing digitalisation of the economy, globally shopping preference of the customers is moving away from physical stores to e-stores.

During the Covid pandemic, e-commerce entities have instituted all the safety and hygiene measures in the supply chain, which has reduced considerably the consumer paranoia. This was all the more important for the quarantined persons as well as for the senior citizens living by themselves. E-commerce has been steadily growing over the past few years, but the pandemic has accelerated the consumer acceptance manifold. According to Unicommerce, an e-commerce e-solutions firm, the sector grew 117 per cent from February 2020 to June 2020. Even in the last quarter of 2020, e-commerce exhibited 36 per cent growth in terms of order volume. The business ecosystem of e-commerce allowed the platforms to scale up quickly to cater to the demand surge from the increased purchases of existing shoppers as well as new shoppers from all age groups. Not just the shoppers, but several new sellers also joined the e-commerce platforms to recover from the lockdown- induced slump in retail. Had it not been for e-commerce, many more retailers and micro, small and medium enterprise (MSME) producers would have had to shut shop. Needless to mention the gig economy livelihoods it has sustained during the pandemic. Another wave of virus spread is hitting the country and some states are imposing strict social distancing measures and lockdowns again. In these times, e-commerce companies need to deploy their resources in meeting the consumer demand. Any government policy that increases the compliance burden will only divert their resources and consequently lessen consumer welfare.

Illustration: Binay Sinha

Restrictive FDI policy also acts as a regulatory barrier to competition. Barriers to entry are essentially structural or economic features of a market that prevent/deter a potential new entrant from entering the market, if they wish to enter otherwise. Gregory Mankiw suggests that there are three main barriers to entry: (1) One entrenched firm fully controls a key resource for which there is no close substitute; (2) When a single firm can supply a good or service to an entire market at lower unit-cost (total average cost) than two/more firms, creating a natural monopoly; (3) Government created entry barriers. The government-created barriers are mostly strategic resulting from perceived national interest but driven mostly by lobbying by competitors. In India, FDI is already restricted in the e-commerce inventory model. The central government is further tightening the rules by extending restrictions on foreign e-commerce marketplaces to their associates and related parties. Touted as an attempt to level the playing field for domestic players, the e-commerce FDI policy, in reality, unlevels the playing field and doesn’t sit well with the concept of competition which is enshrined in the Indian Competition Act. The objective of the competition law is to enhance consumer welfare, which is done by promoting competition in the markets. Any policy that restricts market entry reduces competition, and thus, consumer choices. Competition enforcement not only involves ex-post regulation, but also assessment of ex-ante regulations to remove any regulatory barriers. A competition assessment of FDI policy for e-commerce is thus warranted to protect consumer welfare before any changes are made. Many foreign competition agencies regularly undertake such assessment and publish reports highlighting regulatory barriers in various sectors.

The growing e-commerce sector exhibits increased consumer preference, more so in the current times, to prevent virus spread. Any restrictive move can stifle the sector. Not only is it vital to give e-commerce players space to conduct their operations efficiently to serve the consumers, it is also crucial to remove regulatory barriers to foster fair competition in the sector. The domestic players must thrive on their competence, not the regulatory shield. In any case, as the sector is nascent and the regulations governing it are very new, it is important to allow the existing rules to play out in the market for a few years before undertaking a review. It is important to remember that ease of doing business is as good as it is perceived by the foreign investors. Unstable policy regimes that change constantly heighten the perception of regulatory and political risk in the minds of the investors. Any regressive changes in the FDI policy governing e-commerce would have a spillover impact on foreign investors considering India as an investment destination in all other sectors. 

Mayaram is former Union finance secretary and chairman, CUTS Institute for Regulation & Competition. Sodhi is senior fellow, CUTS Institute for Regulation & Competition.