Regressive step

Fresh restrictions on online retailers are arbitrary

The new guidelines for e-commerce companies will make life even more difficult for online retailers, who are already hemmed in by restrictions. Online marketplaces with foreign shareholders will not be allowed to sell products sourced from companies in which they hold equity. They have also been prohibited from entering into exclusive deals with sellers. The restrictions, which come into force from February 1, will severely restrict pricing flexibility, and potentially deny sellers platforms as well. The objective appears to be preventing discounting and may be designed to please Indian retailers who allege that Amazon India favours merchants in which it owns equity, such as Cloudtail and Appario. There have been similar allegations against Flipkart, which is controlled by Walmart, with lobbyists saying it offers preferential treatment for select sellers. Launching products exclusively on their websites and apps has been a major money spinner for online retailers. For instance, Flipkart sold more than 3 million smartphones on the first day of its Big Billion Day sale in October, thanks to its exclusive deals. The answer to deep discount sales or predatory pricing is to go to the Competition Commission (which domestic online sellers have already done), and not new rules. The e-commerce policy already discriminates against foreign-controlled online retailers, by prohibiting inventory-based models. This restriction itself violates the principles of free market. It prevents cost-savings via smart inventory management by buying and warehousing in bulk.

It can be argued that global investors entered India’s online retail sector with the knowledge of the restrictions foreign direct investors might face. But the new restrictions have changed the playing field, affecting the assumptions upon which online retailers based their operating models. They have taken equity stakes in manufacturers in order to develop relationships, which are now forbidden by diktat. It is hard to justify this decision logically. By analogy, physical retailers carry their own brands display them prominently on their physical shelves, and price them as they please. Even online retailers without FDI do this. Why should one specific class of online retailer face discrimination?

The policy antipathy to deep discounts is also hard to justify. Again, this is inconsistent by analogy with markets such as telecom, where companies have been allowed to offer free services for extended periods and deep discounts. Online retailers reduce costs by deploying smart solutions to website management, creating efficient delivery mechanisms, etc. If they sell at a loss, they will eventually find operations unsustainable. If sellers find the prices on a specific marketplace non-remunerative, they will cease to offer products there. It should be left to the players in a competitive market to figure out what is sustainable, and to set their own prices accordingly. The government should not try to regulate prices or set “sunset” clauses, as has also been suggested by lobbyists, to prevent discounts. 

Online retail is still a nascent sector and it is one of the few growth areas at the moment. By offering a wide range of products across the nation, online marketplaces have already created a retail revolution in small towns and rural areas. They have been major renters of commercial space and generated employment, hiring delivery boys and security staff as well as data scientists and management graduates. Restrictions like this hobble the industry and do a disservice to consumers. The desire to protect the narrow interests of a lobby group should not supersede broader considerations.