Amazon’s aggressive pricing strategies could lead to a massive e-commerce expansion, capturing half of India’s retail market within the next decade
At the launch of the Pahle India Foundation’s report ‘Net Impact of E-Commerce on Employment and Consumer Welfare in India’ on August 21, 2024, Union Commerce and Industry Minister Piyush Goyal took pot shot at the world’s biggest e-tailer Amazon, for selling products directly to consumers and indulging in “predatory pricing” that could lead to massive growth of e-commerce capturing half of Indian retail market ten years from now. This would adversely impact an estimated 100 million small retailers across the country and in turn, lead to “social disruption”.
E-commerce, put simply, is the practice of buying and selling goods or services using the Internet. Predatory pricing involves setting prices for a product at an unrealistically low level to undercut the competition and gain market share. Generally practised by a new player in the market, predatory pricing violates antitrust laws even as it seeks to create a monopoly. Goyal opines that Amazon is selling products on its e-commerce platform at unrealistically low prices which results in heavy losses estimated to be about a billion dollars annually. To fund these losses, it brings the money from its parent but camouflages it as foreign direct investment (FDI). Any FDI in the country is normally welcome given its contribution to capital formation, accelerating economic growth and adding to the foreign exchange kitty. But, the dollars brought by Amazon don’t serve this purpose.
In 2020 also, he had taunted the Amazon boss for the latter’s claim to bring a few billion dollars into India. Then, he had charged that Jeff Bezos was bringing money to make up for the huge loss the company was incurring in its operations in the country. He also voiced concern over the harm it was causing to millions of small retailers. Amazon essentially operates the “market-place” model of e-commerce – a special dispensation carved out by the Narendra Modi Government under which 100 per cent FDI is permitted.
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 marketplace owner books orders, raises invoices, arranges deliveries, accepts payments, handles rejections, warehousing and so on but can’t undertake “direct selling.” Considering that the operator is only expected to provide services instead of a fee, there is no question of any loss.
Yet, Amazon is incurring huge losses. The losses incurred by Amazon are due to huge discounts on the products sold on the platform as well as expenses on promoting exclusive brands. But the discount is normally given by the seller; this is also true of money spent on promotion. The service provider can’t do it unless he is also masquerading as the seller. Do the rules permit direct selling? Under the 2016 guidelines (Press Note PN issued by the Department for Promotion of Industry and Internal Trade or DPIIT in the Ministry of Commerce and Industries), the permission for 100 per cent FDI in the “market-place” is subject to two main riders viz, “The entity cannot permit more than 25 percent of total sales on its platform from one vendor or its group companies.
Further, it can’t directly or indirectly influence the sale price.” Sans any specification as to “who the vendor is”, a firm connected with the “market-place” (either its subsidiary or a joint venture (JV) with an Indian company) is eligible.
In other words, each such entity could control up to 25 per cent of sales on the platform. So, you have companies like Cloudtail – an Amazon venture in partnership with a firm owned by Narayan Murthy – operating as lead sellers on the platform. Thus, contrary to the real intent of the policy which disallowed the e-commerce platform owners from direct selling to individual consumers, the fine print permitted them to do so, albeit through a subsidiary or JV. This is precisely what the e-commerce majors have been doing. They were operating as direct sellers, controlling inventory, giving discounts and so on. A clarification issued by the DPIIT on December 26, 2018, said that “the owner of the marketplace or its subsidiary or its joint venture (JV) with an Indian company can’t have ownership of the seller.”
Further, “a seller on the platform can’t source more than 25 percent of its inventory from a firm connected with the latter. ”Foreign investors can circumvent the first rider by having less than 50 per cent shareholding in the seller firm and arguing that they have no control (majority) over the latter. The marketplace owner can also sell his ‘own’ product through its wholesale arm on the platform. All that the wholesale arm needs to ensure is to restrict supplies to the seller within the 25 per cent threshold. Thus, the clarification hasn’t helped much in diluting their role as dominant sellers. No wonder, small traders, whom the e-commerce platform was intended to help have suffered heavily.
This is because the business that should have gone to the former was appropriated by the latter i.e. the dominant seller owned by itself. The small retailers haven’t got relief from the court. In 2019, Delhi Vyapar Mahasangh (DVM) complained to the Competition Commission of India (CCI) alleging anti-competitive behaviour by Amazon Seller Services (ASS) and Flipkart Internet Private Limited (FIPL).
It argued that ASS and FIPL had entered into exclusive sales agreements with smartphone makers to sell certain phones through a small number of preferred sellers and offering to pay for part of the discount that such sellers would offer during key sales periods such as Flipkart’s big bullion day and Amazon’s Prime Day. Prima facie, the CCI agreed with DVM’s contention and ordered a probe by the Director General (DG) – Investigation.
ASS and FIPL went up to the Supreme Court (SC) to get the order quashed. In August 2021, dismissing their appeal, the SC ordered “the CCI – DG will complete the probe. In its recent findings, the CCI-DG has charged ASS and FIPL with indulging in ‘predatory pricing’ and violation of antitrust laws. The latter will appeal against this starting a fresh round of never-ending litigation. In the end (if at all the result comes), Amazon et al will get away with paying some penalty. How can the government get out of this mess? It could further tighten the rules to say that platform owners can’t hold even one per cent equity in the seller. Further, the former’s wholesale arm must not supply even one per cent of stocks of the latter. This is an abhorrent idea. It can’t be implemented.
Besides, it will be a retrospective change of policy and send a wrong signal. The way forward is to make obvious and straightforward what the bureaucrats had already done in a ‘subtle’ way. The government should say that ‘100 per cent FDI is allowed in retail in all forms, single brand or multi-brand retail (MBR), online or offline (currently, while FDI in MBR online is completely barred, in MBR offline, 51 per cent foreign investment is allowed subject to riders which tantamount to completely barring it.
All these distinctions should go). With this, even as Amazon et al can continue with direct selling to consumers alongside running a marketplace model, Indian retailers including the millions of mom-and-pop stores will also have ‘unrestrained’ access to foreign capital thereby ensuring a level playing field.
(The writer is a policy analyst; views expressed are personal)
https://www.dailypioneer.com/2024/columnists/e-commerce-giants-versus-mom-and-pop-stores.html
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