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Strangled by policy

Free e-retail of red tape, don't intervene further

Business Standard Editorial Comment  |  New Delhi 

Flipkart's "big billion day" sale, in which the e-retailer claimed to have cleared over Rs 600 crore of merchandise in spite of several outages, drew as many brickbats as it did bouquets, One strange outcome was that Commerce Minister Nirmala Sitharaman received complaints from brick-and-mortar retailers about the deep discounts offered by the e-retailer - and said that the government would "look into it". But it would be dangerous for the government to try and intervene in the marketplace, and to further stand in the way of progress in the retail sector. Instead, the sale and its aftermath should trigger a long-overdue discussion of its confused policy stance on e-commerce and organised retail.

Could the government ban discounting, or micromanage retail by offering a rate sheet of acceptable discounts? Stranger things happened in the Licence Raj, after all - and the current retail policy seems to be stuck in a time warp harking back to that era. If Flipkart, or any other retailer, offers deep discounts, it is taking a commercial risk. The discounter may absorb losses and jeopardise its relationship with suppliers to grab market share. Or, it may have found ways to pare costs. Such discounts may start a price war. But that is part and parcel of a very competitive environment. The regulator, in any case, should look into any distortions that arise out of market domination, or unfair trade practices. The policy restrictions on foreign direct investment (FDI) in big retail also affect both e-commerce and physical retail. The policy is ostensibly to protect neighbourhood "kirana" stores. The government cripples retailers' access to finance by refusing to allow FDI. Lack of investment has been a barrier to growth for physical chains. Organised retail penetration is very low, at less than 10 per cent of the overall market of over Rs 31 lakh crore.

Indian e-retailers opted to raise money abroad. But that ruled out normal dealer-warehousing operations, where the retailer sources goods, holds inventory and collects the retail margin on sale. Indian e-retailers have been forced into a marketplace model where they facilitate sales by connecting buyers directly to manufacturers, or to physical channel partners. This offers less control over service quality, and it drastically cuts profits since commissions are much lower than dealer margins - and it increases red tape. Amazon and Flipkart have both been hit by state excise investigations of warehouses.

Protectionist policies help neighbourhood stores enjoy margins of 18-20 per cent. The world's largest chain, Walmart, operates at a margin of below four per cent and e-retailer Amazon's margins are even lower. The small stores are unable to source at lower prices due to lack of scale; nor are they able to deal directly with farmers. The small trader is, therefore, protected at the cost of the consumer, the manufacturer and the big retailer. The sector could be poised for explosive growth if such restrictions are removed. Retail overall grew at 19 per cent since 2012, and it could grow at better than 20 per cent for the next five years. The e-commerce segment could grow even faster. It could easily generate 50,000 new jobs in two years. These would range from low-end functions, such as security and courier delivery, to high-end data analytics and sophisticated purchase-management roles. The big retailers could also source food items directly from farmers and then build the cold chains India desperately needs. All it would take to enable this growth is sensible sector policy. India's young, rapidly growing middle-class population would provide the consumption demand.

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First Published: Thu, October 09 2014. 21:46 IST