India has come a long way since the process of economic reforms and liberalization started nearly three decades ago [1991] – with major focus on abolishing controls and license raj. It can boast of unprecedented progress with corresponding gains by way of putting the economy on a high growth trajectory. The achievements have been particularly noteworthy under Modi – dispensation.
Yet, our governance systems including those which have a strong bearing on the economy continue to remain shackled by bureaucratic controls and red tape. The ability of the bureaucrats [a sophisticated nomenclature to describe officials] to maneuver and navigate things the way they want has not diminished. One can see a vivid demonstration of their ability in the way the subject matter of foreign direct investment [FDI] in ‘market-place’ model of e-commerce has been handled.
In 2016-17, Modi – government took a decision to allow 100% FDI in the so called ‘market-place’ model of e-commerce which was implemented vide Press Note [PN] 3.
The PN-3 was issued by the then department of industrial policy and promotion [DIPP] which has been rechristened as the department for promotion of industry and internal trade [DPIIT] – in sync with the thrust of the present dispensation on ‘Make in India’ and giving a boost to domestic traders. The DPIIT is housed in the ministry of commerce and industry.
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 policy was intended to be a win-win for all stakeholders viz. the millions of small traders [by giving them access to vast platform and even support for selling their products smoothly and efficiently], foreign companies who get access to the ever growing Indian market and the government as increase in FDI helps improve the twin deficits viz. current account and fiscal deficit.
The bureaucrats needed to write the rules in a manner such that the foreign entity owning the marketplace does not indulge in direct selling [in consonance with the government’s policy thrust on prohibiting FDI in online multi-brand retail]. It meant that neither itself nor any of its subsidiary nor its joint venture [JV] with Indian resident would have a stake in the vendor selling on its platform.
This is where the skulduggery of the officials came in to play. So, they wrote ‘owner of the market-place can’t permit more than 25% of total sales on its platform from one vendor or its group companies’. Another condition stated ‘it can’t directly or indirectly influence the sale price’.
The insertion of words ‘or its group companies’ in the first condition legitimizes the role of the market-place owner as a vendor [albeit vide its group company] which goes against the policy intent. Further, the cap of 25% on sales by one vendor implies that four subsidiaries/JVs of the foreign major can control all of sales on the market place. This is precisely what is actually happening.
For instance, SuperComNet, RetailNet, OmniTechRetail – all companies in which Flipkart holds substantial stake – are the so called preferred sellers on latter’s market-place. These sellers pick up products from the wholesale arm of Flipkart in India and sell on latter’s market-place. Ditto for Amazon.
Thus, contrary to the declared policy, the foreign companies had managed to get into ‘direct selling’ [courtesy, maneuvering by bureaucrats]. No wonder, Walmart had sensed a huge opportunity and even paid a mammoth US$ 16 billion for acquiring over 3/4th stake in Flipkart last year. Meanwhile, millions of small traders who were intended to be a major beneficiary got a raw deal.
This prompted the DPIIT to come out with a circular dated December 26, 2018 which clarifies that the market-place entity can’t have ownership in the vendor. Further, the vendor will not be allowed to sell its products on the marketplace entity’s platform if former’s inventory is deemed to be in control of the latter or its group companies. Also, the “25% threshold on sale” in PN-3 has been omitted.
This is a significant improvement over the subsisting rules as the market-place owner can’t own even 1% share in the vendor. So, the JVs such as Cloudtail [between Amazon and Catamaran Ventures of Narayan Murthy’s] will have to go. But, a determination as to when the inventory of the vendor will be deemed to be controlled by the market-place owner has not been spelt out. Moreover, the rules don’t prescribe penalties in case the e-commerce entities fail to comply.
In the follow-up to the December 26, 2018 circular, the foreign majors are looking for the so called ‘alpha sellers’ and ‘beta vendors’ who will replace the hitherto preferred sellers even as their business model remains fundamentally intact.
The changes do little to reduce the dominance of the foreign majors on the market-place and open it to all retailers. Things would be better if instead of making no mention of the ‘threshold on sale’, the rules had stipulated ‘single vendor should not have more than 1% share in the total sales on the platform’. This would ensure that the platform is not controlled by a select few.
Let it be understood in no ambiguous terms that any policy that involves state intervention and associated bureaucratic red tape can’t be in the interest of stakeholders – not the least millions of small traders who are most vulnerable. There is an urgent need for unshackling the Indian retail which is hamstrung by a plethora of policies for various segments based on artificial distinctions.
The government should do away with market-place concept; instead allow 100% FDI in retail in both ‘online’ and ‘offline’ without any riders. This will create level playing field and make way for several players – both domestic and foreign – with beneficial outcomes for millions of small traders.