India: Modi's New E-Commerce Policy 2018 (Impact On Online Retail Giants Amazon/ Flipkart, End Consumers And Benefits To The Local Retail Sector)

Last Updated: 28 January 2019
Article by Shubham Borkar
Most Read Contributor in India, January 2019

"Kya apna Kya paraya, iska farq hume aaj samjh aaya, thoda der se aaya par durust aaya"

Ahead of the 2019 Lok Sabha Elections Prime Minister Narendra Damodar Modi and BJP Government has brought in another Masterpiece legislation which is a Point Blank hit to online Retail Giants like Flipkart and Amazon. This is the Era of E-commerce from clothes to groceries, from furniture to electronics you and me buy everthing online  as a result of which, Jeff Bezos Founder , CEO, Chairman of Amazon ( Apni Dukaan) is one of the richest in the World whereas small retailers in your community, neighbourhood( actually apni dukaan) are vanishing day by day as they are unable to cope up with the hefty discounts and exclusive sale agreement of these big shots. However the Indian Government has come to their rescue, call it a pre-election gimmick or a masterstroke. Ladies and Gentlemen presenting the Latest E-commerce Policy of India, 2018.

The Policy

The retail sector in India  is one of the most regulated sectors and due to the involvement of a huge population, it is also politically sensitive. The government has often sought and tried to make policies which tend to restrict retail trade by foreign companies. The E-commerce policy of 2018 introduced by DIPP (Department of Industrial Policy and Promotion) under the Ministry of Commerce is one such policy which governs foreign direct investment (FDI) in E-commerce sector and thereby restrains online retail giants like Amazon, Walmart owned Flipkart etc and forces them to revamp their trade practices. There are speculations that due to this policy, business in India will no longer be viable for these online retailers.

Who will face the Impact?

This policy has impact on three major groups, i.e. the online retailers themselves, the small brick and mortar retailers which compete with the online retailers and finally, the end consumers. The small, local retailers have welcomed this policy as they will benefit from it, whereas the online retailers have labelled it as authoritarian. End consumers will not be able to make use of flash sales , high discounts which seems to be a prima facie loss to them. The key features of the policy and its implications on all the stakeholders have been discussed in detail in this article.

Highlights of the E-commerce policy, 2018

  • Any entity involved in e-commerce marketplace shall not exercise ownership or control over the inventory it offers to sell. Any such ownership over the inventory will convert it into inventory based model from marketplace based model, which is not entitled to FDI. Explanation – An entity shall be deemed to own the inventory of a vendor if over 25% of the purchases of such a vendor are through the said entity.
  • An entity shall not be permitted to sell products of a vendor if it owns any stake in the vendor's company or exercises any form of control over the inventory of such vendor. The entity will also be prohibited from selling products of vendor companies over which it has equity interest.
  • All online retailers are required to maintain a level playing field for all the vendors selling their products on the platform, and it shall not affect the sale prices of goods in any manner. Further, the entity cannot enter into exclusive sales agreements with the vendors, pushing them to sell their products only on one platform.
  • The deep discounts offered by these online retailers will no longer be available, and they will have to make new business models to continue business in India.
  • According to an independent analysis conducted by PwC ( PriceWater Cooper) based on estimates and other publicly available information, online retail sales growth, tax collections and job creation would be directly and severely affected by this new policy. The analysis showed that the gross-merchandise value of goods sold online could reduce by $800 million. It is further predicted that the sales would hit a new low, dropping off by almost $46 billion by 2022.1
  • Soon after Thomson Reuters' story on the PwC analysis was published, the Confederation of All India Traders, which has forever advocated tougher scrutiny over online retailers, refuted the predictions of PwC.

Effects of the policy on Online retailers

The online retail giants like Flipkart, Amazon, EBay  will now have to completely revamp and reform their business models  to comply with the policy. They will no longer be able to encourage sales of their preferred vendors as they are now required to make a level playing field for all vendors. They will also not be able to sell products of brands in which they have direct or indirect equity interest involved.

The discounts, flash sales and other benefits like cash backs offered by these online retailers will now become a thing of past, and this will severely hit their sales as these are the most alluring features which attract the customers to their platform. This policy  aims to clamp down huge online retailers and strengthen small retailers and encourage them to sell goods of their own label.

In response to this move of the government, online retail giants like Amazon and Flipkart plan on discussing their concerns with the government with the help of industry bodies like Confederation of Indian Industry (CII) and & Industry FICCI, other e-commerce  firms, and investment giants such as SoftBank, Tiger Global, Sequoia and Naspers.2

Benefits to the Local Small Retailers

The present policy clearly aims to help small retailers to compete with the corporate giants. The customers who had been lured away by these big online retailers will again turn back to the local, brick and mortar retailers as they will get lesser options on online platforms. This policy is another step contributing to the Make in India project of the government. This policy will also ensure that money of India remains in India and is circulated in the market, which was not happening now. Each one of us, bought from online retailers majority of which was foreign owned, money flew from India, markets were cashless and circulation of money was restricted.

The Confederation of All India Traders has come out in support of the new policy, stating that it would bring equality and fair play in retail sector and stop multinational corporations from adopting unfair means to boost their own trade.3

Apart from these local retailers, small online retail companies (for example, Snapdeal, ShopClues etc) will also benefit from the policy as they will now be able to compete with the giants.

Impact on End Consumers

The group which is most affected by the policy is the end consumers, who made use of offers and discounts of online retailers for all their needs, including the most basic needs of groceries and clothing. The attractive flash sales and discounts going year round offered affordable products to middle class customers, but these will not be available to them anymore. Further, as the local and online retailers will offer no different facilities, and the discounts offered by online retailers will reduce substantially, they will be forced to switch to local retailers and look into more options to find the best price.

As the provision of cash backs will also be regulated, the incentive given to customers to shop more often from a said platform will reduce, affecting the decision of the customer. This will ultimately result in less shopping by a majority of customers. The end of exclusive deals will also implicate the customers, for example, there won't be and exclusive partnership between OnePlus and Amazon that enables OnePlus to give away earphones for free.4

Contrast View

The new policy can also be seen as a heavy blow in the online retail sector, and has caught online retailers off guard and clueless about their future business policy in India. It will discourage foreign investment in the country as the investors will not be interested in investing in entities over which they have no control and which do not guarantee profits like the giant corporations do. Instead of making the retailers independent and strong enough to compete with MNCs, this policy blocks out competition in the market, and only provides crutches to the local retailers by reduced competition.

This policy can be seen as a example of excessive control of the government over trade, as it also restricts what can and what cannot be sold by the entities.

The policy was introduced in December, 2018, just a few months before the Lok Sabha elections, which the ruling party wishes to win. This policy can said to be a populist one, and it is an attempt to appease the small shopkeepers and local retailers, which form a major chunk of voters. Since these retailers were long been threatened by multinational giant retailers, they had been pressurizing the government to make amends to the E-commerce policy so that they can also compete viably.

Footnotes

1 https://uk.reuters.com/article/us-india-ecommerce-exclusive/exclusive-indias-e-commerce-curbs-could-hit-online-sales-by-46-billion-by-2022-pwc-draft-analysis-idUKKCN1PA219

2 https://www.business-standard.com/article/companies/flipkart-amazon-to-put-up-united-front-against-populist-e-commerce-policy-119010200954_1.html

3 https://economictimes.indiatimes.com/industry/services/retail/modis-e-commerce-policy-here-are-the-winners-and-losers/articleshow/67285057.cms

4 https://www.businesstoday.in/current/policy/achhe-din-over-for-indian-consumers-5-reasons-why-new-e-commerce-policy-should-worry-shopaholics/story/304655.html

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