Amidst all round gloom caused by Corona virus that has also impacted foreign direct investment [FDI] [during the first quarter of 2020, it has dipped by 30%], comes a buoyant news. On April 22, 2020, the California based US Internet giant Facebook announced its decision to buy 9.99% stake in Reliance Industries Limited [RIL] digital unit Jio Platforms Limited [it owns a wide spectrum of businesses viz. wireless broadband, home broadband, enterprise broadband, narrow-band, internet-of-things businesses and a bouquet of digital apps], for US$5.7 billion [more than Rs 43,450 crore].
While, the deal gives an opportunity to Facebook foray in India’s telecommunication sector [after unsuccessful attempts made in the past], RIL gets to pare its debt – currently about Rs 300,000 crore, but more importantly secures access to the over 400 million-strong database of WhatsApp [a wholly owned subsidiary of Facebook] which will help in jumpstarting its e-commerce business under JioMart.
Furthermore, with WhatsApp firmly entrenched as the dominant OTT [over-the-top] messaging platform in India, Jio will now have a channel for promoting its other digital services directly to the customers of its competitors viz. Vodafone and Airtel.
Under e-commerce, the duo intend to offer consumers the technology enabled wherewithal to access the nearest kirana shop [a euphemism for neighborhood store], which can deliver products and services after transactions via JioMart using WhatsApp. Nearly 30 million small kirana shops [out of a total of about 60 million small businesses in India] will be empowered to digitally transact with every customer in their neighborhood. Initially, the focus will be on products already being offered by merchants which they understand well and thereafter new offerings can be brought to the table.
JioMoney – the payment platform already launched by RIL will be integrated into the JioMart venture to facilitate hassle-free seamless payment for transactions. This will ensure faster delivery of day-to-day items ordered by consumers from nearby local shops.
During the last 5 years or so, there has been proliferation of e-commerce. The space is dominated by two foreign giants viz. Amazon and Flipkart [co-promoted by two Indians, grew phenomenally with support from venture capitalists, it was eventually taken over by US retail giant Walmart in 2018]. Both have got deeply entrenched in the lucrative Indian retail under a policy that allowed 100% FDI in the e-commerce market-place as per guidelines issued in early 2016 – encapsulated in Press Note 3.
The intent of the policy was to enable small traders [including the ubiquitous kirana shops] increase their reach to customers manifold un-attenuated by any geographical limitations. This is how things were expected to pan out.
The ‘market-place’ is a platform where vendors sell their products to consumers even as its owner [say, Amazon] merely acts as a facilitator. The market-place owner provides services such as book orders, raise invoice, arrange delivery, accept payments, handle rejections, warehousing etc in lieu of a fee charged from the vendor. But, he can’t undertake ‘direct selling’. A small trader was expected to use this platform to get access to customers on a scale which he could not even imagine sitting in his shop. But, that was not to be.
Under the 2016 guidelines, the permission for 100% FDI in market-place was subject to the condition that ‘the entity cannot permit more than 25 per cent of total sales on its platform from one vendor or its group companies’. This made it possible for a firm connected with marketplace [either its subsidiary or a joint venture (JV) with an Indian company] to be eligible as a vendor. So, you have companies like Cloudtail – an Amazon venture in partnership with a firm owned by Narayan Murthi – operating as lead seller on the platform.
Thus, contrary to the real intent of the policy which disallowed marketplace owner from direct selling to individual consumers, the fine print permitted them – albeit by its subsidiary or JV. This is precisely what the e-commerce majors have been doing. They were operating as direct sellers thereby severely restricting the small businesses/traders from selling their goods on the platform. Far from gaining, the latter have even lost on their subsisting sales.
A clarification to Press Note 3 issued on December 26, 2018 has not materially altered the position on ground zero. It says ‘the owner of market-place or its subsidiary or its JV with Indian company can’t have ownership of the seller’. Further, ‘a seller/firm on the platform can’t source more than 25% of its inventory from a firm connected with the latter’. The market-place owner can get around both (i) by having less than 50% shareholding in the seller firm and argue, he has no control [albeit majority] over the latter; (ii) its wholesale arm continuing supplies to the seller but within the 25% threshold.
The small traders have made several representations to the government and even taken the matter to the court but have failed to get any relief so far. Thus, in a public interest litigation [PIL] filed by the Retailers Association of India [RAI] in early 2018 alleging violation of norms for FDI in e-commerce, the Enforcement Directorate [ED] had even informed Delhi High Court [DHC] on October 31, 2018, that it was investigating violation of the Foreign Exchange Management Act [FEMA] against Amazon et al. But, the proceedings are stuck due to lackluster attitude of agencies and the court.
Likewise, the All India Online Vendors Association [AIOVA] – an umbrella organization of small traders petitioned the Competition Commission of India [CCI] alleging abuse of market dominance against Flipkart India Pvt Ltd, which is into wholesale trading/distribution of books, mobiles, computers and related accessories and e-commerce marketplace Flipkart Internet Pvt Ltd. But, the CCI saw nothing wrong in this practice. The National Company Law Appellate Tribunal [NCLAT] quashed the CCI order and ordered a probe.
In another complaint filed on January 13, 2020 by traders’ body Delhi Vyapar Mahasangh [DVM] alleging anti-competitive behavior by Amazon Seller Services and Flipkart Internet, the CCI had ordered a probe. But, the investigation has been stayed by High Court of Karnataka for two months.
The current state of affairs is doing no good to anyone, be it foreign investor, small trader or consumer. Even as small traders are losing heavily, Amazon et al have a Damocles sword hanging over them [considering that their presence in ‘direct selling’ is in violation of the spirit of the policy, the possibility of the government shutting their ‘back-door’ entry will remain] and the consumer though a beneficiary currently, will pay heavily in the long-term as Indian retail gets increasingly cartelized by a few players.
All the three stakeholders are crucial for continued growth of Indian retail at the desired pace. While, FDI is needed for boosting much needed investment in handling, storage, distribution, quality assurance etc, growth of small businesses is vital for increasing employment and income. And, without addressing consumer concerns with regard to both quality and price, neither small traders nor the foreign e-commerce majors will be able to sustain their businesses.
How can the interests of all three be reconciled? Does e-commerce business model under JioMart offer a good alternative? What is the way forward?
Reliance model merely enables a kirana shop better connect with his neighborhood customers through use of technology, providing back-up support and facilitating payments. Whether or not, it will help in adding to his customer base and increase in income, one can only wait and watch. However, it is far from filling the void created by the flaws in the extant policy dispensation. .
For too long, Indian retail sector has suffered from a piece-meal approach and too much of ad-hocism. There are at least half-a-dozen policy dispensations for different segments viz. single-brand retail [SBR]; multi-brand retail [MBR] offline; MBR [food]; e-commerce marketplace and so on. This has led to policy uncertainties, too much of bureaucratic discretion, nepotism and corruption. There could not be bigger bottleneck to FDI.
The government should do away with artificial distinctions and adopt a holistic approach towards retail. It should allow 100% FDI in retail uniformly for all sectors – in both online and offline without any riders. This will create level playing field and in particular, remove the present disadvantage of MBR offline. The field will be open to a vast array of foreign investors who will come in droves unlike the present dispensation which deters them.
There can’t be a better way of helping small traders as it leads to all round development of the infrastructure and offering wide range of choice for sourcing products. They can and will co-exist with foreign majors. It will be pro-consumer in the long-run with many players catering to their needs at competitive/affordable price.