Tighter rules governing e-commerce platforms notified by the government this week are designed to level the playing field for all vendors in an online marketplace. These impose restrictions on related-party transactions, preferential treatment to suppliers, and inventory dumping. All of these were market imperfections that had crept in since the government had announced the foreign direct investment (FDI) policy for the sector in 2016, during which US retail giants Amazon and Walmart came to occupy a commanding position in India’s $41-billion e-commerce industry. Indian brick-and-mortar retailers have grown restive, claiming online marketplaces like Amazon and Flipkart have acquired the power to influence retail prices, in contravention of the policy that restricts FDI in business-to-consumer (B2C) e-commerce, but not in business-to-business (B2B). The government appears to have bought this argument and the new set of rules are meant to give effect to the original e-commerce policy even as inter-ministerial consultations are on for drawing up a new one.
India is a crucial battleground for Amazon and Walmart—they have committed a combined $21 billion to this market—and they may now have to review their business operations in the country. Amazon has several joint ventures, including Cloudtail and Appario, that may be affected by the restrictions on sales by related parties. Flipkart has exclusive partnerships with smartphone brands like Xiaomi and Oppo that could, in turn, face a ban on exclusive deals for products. Both offer promotional schemes such as cashbacks and faster delivery, which are now deemed discriminatory. The companies will now have to furnish reports to the Reserve Bank of India annually, adding another dimension to compliance and monitoring of the e-commerce industry. Flipkart and Amazon can thus be reasonably expected to push back against rules they find too constrictive, given the size of their investments in the ecosystem that fuels e-commerce on this scale.
The government, on its part, is clear that the new rules are needed to prevent anti-competitive behaviour in the e-commerce industry—online marketplaces should not have any role in determining the prices of the products sold on their platforms. As regulator, it cannot avert its gaze from market distortions, even if the latest rules do not fit snugly into the country’s competition law, which proscribes only a select segment of exclusive arrangements that have a demonstrably significant effect on market freedom. The focus should be on establishing specific arrangements that create barriers to new entrants. The extra load on auditors is, however, a small price to pay in the larger interest of transforming India’s retail sector into a modern industry. E-commerce provides India’s army of medium and small enterprises one of their least-cost options to sell their wares, and the government’s approach of encouraging online marketplaces with due safeguards cannot be faulted. But the regulatory reflex must be tempered by the realization that a ramshackle retail sector is not in the interests of consumers or producers.