New Policy for E-commerce in India: Restricting FDI will favor Indian companies in the long-term

In the past few years, the electronic commerce or e-commerce sector has soared rapidly in India, boosted by the rise of smartphone use and attractive online offers. Amazon and Flipkart have become household names, dominating the retail scenario in the country. However, the e-commerce ecosystem is set to undergo major changes following the policy changes made by the central government.

The new draft policy was issued on December 26, 2018, by the Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce and Industry of the Government of India. This policy reviews the existing FDI (Foreign Direct Investment) policy in e-commerce and will affect how foreign-funded e-commerce firms expand in the country.

The basics of E-commerce in India

Back in 2016, an FDI policy regulation by the DIPP started to allow 100% FDI in the marketplace model of e-commerce while disallowing such investments in the inventory model. To briefly describe the laid out guidelines, the marketplace model refers to a platform provided by an e-commerce entity for buyers and sellers to interact and carry out transactions, such as Amazon and Flipkart. On the other hand, the inventory model refers to e-commerce entities that own the inventory of goods and services and directly sell them to customers. A famous example would be China’s Alibaba.

Recently, exclusive online-only deals between brands and e-commerce websites have sprung up. Certain product ranges and private labels have been launched solely on websites which follow the marketplace model. Many other actions point to the growing tendency of foreign-owned e-commerce giants to sidestep the existing systems that are meant to regulate their actions which in turn affects offline traders and MSMEs.

The key changes

The main highlight of the policy restricts group companies of e-commerce entities from using retail strategies, especially the bulk purchase of branded goods by related party sellers which can “distort competition”. Marketplace model e-commerce firms controlled by foreign investment will not be allowed to own or control inventory. However, if such firms are Indian-owned or controlled, they will be allowed to hold inventory if the products are fully domestically produced.

The sellers having equity ownership by an e-commerce marketplace or its group companies, will not be allowed to sell on that marketplace anymore. Also, sellers will be able to source a maximum of 25%  of their purchases from the marketplace or its group companies.

The draft mentions setting up a separate wing in the Enforcement Directorate to handle any alleged violation of foreign investment guidelines. It also recommends that the Competition Commission of India or CCI must analyze and scrutinize mergers and acquisitions of e-commerce firms that may lead to the formation of monopolies or cartels.

A sunset clause in the policy sheds light on tackling “differential pricing strategies”, such as deep discounts. It suggests setting a “maximum duration” for such strategies.

The reaction

According to the draft policy, the primary goal is to “create a level playing field for foreign and domestic players in the Indian market”. The new norms push for non-discriminatory treatment of vendors and for restricting larger players from using extreme pricing strategies.

India’s very own Flipkart agreed that the new norms will benefit the economy in the long term, and re-assured stakeholders that their commitment to “generate significant direct and indirect employment” stays solid, whereas, USA’s Amazon has not published any official statement in reaction to the policy changes.

The founder of Snapdeal, Kunal Bahl, tweeted:

Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers”. Snapdeal has been struggling to hold footing in the present race between Walmart-owned Flipkart and Amazon in India.

The USISPF (US-India Strategic Partnership Forum) has criticized the move, stating that the changes would harm consumers and negatively impact the growth of e-retail in India. A spokesperson of All India Vendors Association expressed his dissatisfaction, stating: “Instead of investigating violations by particular companies in existing Press Note 3/2016, the government has washed their past sins and formed a new policy.

Consequences of the changes

It must be noted that small-scale vendors and shop owners constitute a large fraction of supporters of the present government. Preceding the Lok Sabha elections in 2019, this policy may prove to be a masterstroke for the BJP government.

Huge discounts and unbelievable online deals may become a thing of the past for Indian consumers. While Amazon and Flipkart need to rethink their sale strategies in the country, what remains to be seen is how independent online sellers and brick-and-mortar stores thrive in this new context.

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