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A half-hearted attempt to liberalize e-commerce
It is a limited policy with multiple constraints, skirting the tough decisions
The National Democratic Alliance (NDA) government’s policy regarding foreign direct investment (FDI) in business to consumer e-tail, announced on Tuesday, has made a virtue of necessity. Indian players in the sector and their foreign investors have been making an end run around the poorly defined ban on FDI for years now with their marketplace model. There is little the government could have done now save regularize such inflows; the alternative was too disruptive to be a serious option. Unfortunately, it has hedged the mildly progressive move with conditions that undercut it and illuminate the shortfalls of the NDA’s stance on FDI in the broader e-commerce and organized retail space.
Among the riders attached to the policy, no vendor can account for more than 25% of the sales of a marketplace e-commerce entity. And such entities are barred from influencing the prices of goods sold via its platform—by, say, remunerating vendors for discounts on sticker prices. This is an egregious display of micromanagement. Buffering brick-and-mortar retailers on multiple fronts against e-tail rivals—whether it’s from an e-marketplace becoming a cover for a de facto inventory-led operation or from e-tailers offering price points conventional retailers can’t match for logistical reasons—is the obvious underlying reason.
There is a perverse logic here, in keeping with the Bharatiya Janata Party’s (BJP) previous intransigence on the issue of FDI in multi-brand retail. The United Progressive Alliance suffered a humiliating setback in 2012 when it opened up the sector, only to have to water down the initiative and leave it to the states in the face of fierce opposition from the BJP, among others. And the BJP’s stance was a component of its poll plank in 2014. By not allowing FDI full play in the e-commerce space, it is now ensuring a level playing field—albeit by chopping everyone off at the knees.
This trail of protectionism leads back, ostensibly, to the traditional retail sector—the neighbourhood kirana stores. It makes for good optics politically, as in 2012 when they were used to justify blocking FDI in multi-brand retail. It also makes for poor economics. There is little concrete evidence to show that e-tail or organized retail actually hurt traditional retail to any substantial degree. The latter occupies the largest space in the retail sector by far and extensive surveys show that coexistence is entirely possible. Quite apart from this, the NDA’s policies represent a fundamental misapplication of the state’s market-shaping powers.
In effect, consumers in general and the agricultural sector have been shortchanged to protect retail pressure groups that have brought pressure to bear. Consumers are too diffuse a grouping to have any political coherence or relevance, and farmers have been glutted for decades with subsidies. Mature western markets have shown that lower e-tail prices force brick-and-mortar retail to increase efficiency and reduce costs in turn. It compels them to innovate with convergence retailing and value-added services to increase consumer loyalty, an area where e-tail is lacking. It offers a platform to small vendors and producers who lack the logistical capabilities to access larger markets on their own. It can cater to non-metro areas that have traditionally been low priority for organized retail, compelling the latter to follow suit.
A Crisil study shows how this is playing out in India, with distribution of brick-and-mortar stores shifting from 66% in Tier-I cities and 34% in Tier-II and III cities in 2010 to 55% and 45%, respectively in 2014. As far as multi-brand retail goes, investment here is essential for the cold storage and supply chains that are needed to improve the health of India’s agricultural sector.
Competition, in short, increases efficiency and encourages innovation, the market’s oldest lesson. The only entities who benefit from imposing constraints are large players in the organized retail sector. Allowing FDI only in marketplace e-tail, and conditionally, protects them to an extent from the pressure e-commerce can bring to bear. And disallowing FDI in multi-brand retail means they won’t face international competitors with deep pockets, or smaller domestic rivals upscaling with foreign investment.
New technology and the development it brings about are always disruptive. The government’s role must be to provide societal safety nets for those negatively affected—not to prevent that disruption. Also on Tuesday, NITI Aayog CEO Amitabh Kant warned against protectionism. When India did so in the past, he said, it created substandard firms. The government should pay attention.
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Business NewsOpinionA half-hearted attempt to liberalize e-commerce
First Published:1 Apr 2016, 12:41 AM IST
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