With increasing penetration of internet, surging middle-class, its growing aspirations and focus on customer convenience, online retail commerce in India is projected to increase from an already high of US$ 38.5 billion in 2017 to over US$ 200 billion by 2026.
Seizing the unfolding opportunities, foreign majors such as Amazon,Walmart/Flipkart etc have already made substantial investment in the marketplace model of e-commerce. Under a policy notified in 2016-17, the government allowed 100% foreign direct investment [FDI] in this format.
The market-place is an electronic platform on which the sellers/vendors get connected with the end consumers and carry out the sale/purchase transactions. The owner of the platform is expected to act only as a facilitator by providing support services viz. warehousing, logistics, order fulfillment, payment collection, handling rejection etc to the vendors but not undertake direct selling.
The norms in this regard were further clarified through a circular dt December 26, 2018 to state that the owner of the market-place can’t have ownership in the vendor nor exercise control over the inventory of the latter. The policy prohibits FDI in ‘inventory’ model or direct selling to consumers [B2C].
In the process of conducting electronic transactions, these companies generate data on millions of customers. Advanced techniques such as artificial intelligence [AI], data analytics, cloud computing etc can be used to track consumer behavior/history [by looking at information on frequency of visiting a website/search results to time spent in reading an article stored in the cloud] and target potential consumers with customized marketing content.
Apart from deriving commercial advantage, the data may even be susceptible to misuse and infringe on privacy of the citizens which the Supreme Court [SC] has held as a fundamental right. The storage of such data in the servers located in foreign jurisdictions adds to the concern regarding its misuse.
In this backdrop, a draft policy on e-commerce – prepared by the department for promotion of industry and internal trade [DPIIT] in consultation with other concerned ministries – focuses on protection of such data, restrictions on its cross-border movement and sharing of ‘sensitive’ data with third parties [including foreign governments] even when the consumer consents to such storage.
The policy requires foreign companies to set up domestic data storage; mandatory register business locally and have a representative; give the government access to source code and algorithms of AI systems for facilitating transfer of technology and development of applications for local needs as well as for security. It calls law makers and regulators to set up dedicated ‘technology wings’ to help them ‘understand and analyze transactions in proper light.
The draft proposes continuation of the extant policy on FDI in market-place and stresses the need for giving access of these platforms to small traders and retailers and ensures their running in a ‘transparent’ and ‘non-discriminatory’ manner. Furthermore, it recommends that advertising charges in e-commerce must be regulated, especially for small enterprises and start-ups.
The policy proposes setting up of e-consumer courts to consider and redress grievances. It moots taxation of electronic transactions and block the ‘Gifting’ route used by Chinese sellers to escape payment of customs duty. It does not propose setting up of a regulator for the e-commerce sector; instead, a standing group of secretaries on e-commerce as the primary body for regulating the sector.
The policy needs to be evaluated on three main planks viz. (i) promoting businesses to catapult Indian economy to a high growth trajectory; (ii) protect the fundamental rights of the citizens to privacy and (iii) protect and promote the security of India.
Even as all the three planks are equally important, the policy should strike a fine balance. However, looking at the proposals one would get a feeling that there is disproportionate emphasis on protection of the data. Indeed, this is being pushed to a point whereby this might even affect the growth of businesses and the economy.
The requirement for foreign players to mandatory register the entity locally and have a representative in India will discourage them from investing here as the cost and hassles of running businesses and meeting regulatory requirement increase. The insistence on having their physical presence locally is out of sync with the underlying philosophy of digital transactions germane to e-commerce.
Similarly, the cost and hassles associated with asking foreign companies to set up server/data collection center has to be weighed against the objective of preventing misuse and minimizing security risk. The insistence on access to source code and algorithms of AI systems appears to be too stringent requirement which is bound to be resisted by the foreign majors.
The government should refrain from going for extreme steps as it may run the risk of undermining business confidence and affect investment and growth. Instead, it may consider pragmatic arrangement whereby concerns on protection of ‘sensitive’ data can be effectively addressed. The approach should be based on risk assessment, identification of potential misuse and timely preemptive action. The foreign company should extend full cooperation to the agencies.
This approach will also help in capturing all the digital transactions needed for garnering tax revenue – indirect and direct – from the vendors. Likewise, the proposed ‘technology wings’ will be able to deliver the intended result only when the government works with the companies in a spirit of cooperation.
Its focus should be on better ways of achieving the objective which won’t be possible merely by taking possession of the ‘data key’. So, it can let the key remain with the company which can be goaded to furnish the data as and when needed – in a spirit of mutual give and take. There is also an urgent need to set up a regulator.
The extant policy on FDI in e-commerce market-place needs to go as it has been misused in the past and December 26, 2018 clarifications won’t help much in ensuring compliance. Instead, the government should allow 100% FDI in retail in both ‘online’ and ‘offline’ – without any riders. This will create level playing field and benefit all stakeholders including small traders and retailers.
The draft e-commerce policy may also fail to pass muster at the WTO where developed countries are keen to brainstorm – sooner than later – for framing standard rules on e-commerce. The government should overhaul the policy draft keeping in mind the overarching national interest and multilateral rules.