Turmoil in the marketplace

FDI norms for e-commerce should be relaxed

A party that promised the business community a radical departure from the Congress’ economic management appears to be copying its worst practices straight from the bad old days of the licence-permit raj. Last week, the government asked top e-commerce retailers Amazon and Flipkart, the Indian arm of Walmart, to furnish details of their top five sellers, investments, and commission agreement with vendors. The inaptly named Department for Promotion of Industry and Internal Trade (DPIIT) has sent both the e-commerce giants separate questionnaires, asking them to provide details of their capital structure, business model, and inventory management system. There are several questionable aspects to this move. First, the investigation has been initiated on a complaint from a brick-and-mortar retail traders’ lobby, the Confederation of All India Traders (CAIT), which alleges that these online marketplaces have been violating norms on foreign direct investment (FDI) to report their highest ever sales over Dussehra.

This surge stood in stark contrast to the noticeably poor footfalls in brick-and-mortar outlets and undeniably pointed to high online discounts. It is unclear why the government should mobilise its own administrative capacity to launch this investigation when an independent competent authority in the shape of the Competition Commission of India (CCI) exists to deal with complaints of such restrictive trade practices. Given that the CCI has investigatory powers, it would have been appropriate for the CAIT to have referred its complaint to the CCI or for the government to have done so. The fact that the CAIT has been an enthusiastic supporter of the Bharatiya Janata Party may explain why the government has decided to defend its interests from deep-pocketed foreign-owned online platforms.

The CAIT’s principal accusation is that Amazon and Flipkart have violated FDI norms by enabling deeper discounts, which undercut its member-retailers. These rules, which came into play in February this year, were designed specifically to protect domestic online and physical retailers and have no embedded economic logic. One, they debarred companies from exclusive marketing arrangements with foreign-owned online portals. Two, online entities with foreign investment cannot offer products sold by retailers in which they hold an equity stake. Third, online e-commerce giants are debarred from stocking 25 per cent of their inventory from a single vendor. Fourth, such online marketplaces were prohibited from manipulating the prices of products or offering deep discounts. If such micro-managed protectionism contradicts the spirit of a forward-looking globalised economy that India aspires to be, it also reflects a fundamental misunderstanding of the online business. Rather than being the product of undercutting, online discounts are the result of significantly lower distribution costs by eliminating one key element of the retail chain — the retail store. Suppliers to these online marketplaces may choose to leverage this competitive cost structure to offer deeper discounts during festive seasons. Physical retailers do the same thing but can never hope to compete because of higher cost structures.

Foreign marketplaces may well have been violating FDI norms. And by mobilising its political clout, the CAIT may well have introduced an irritant in their functioning. But if its members hope to extract lasting gains from these investigations, they are not only behind the curve but destined to fall behind even further as the Indian consumer embraces e-commerce, foreign or otherwise, with unpatriotic enthusiasm. The government would have done better to have relaxed its February press note rather than enforcing a level playing field.