In the current times, the consumers of a variety of items from FMCG to electronics to consumer durable etc are having a hey day with access to these at substantially low price from e-commerce platform. Several products are available at a discount as high as 50% [or even higher] over the maximum retail price [MRP]. Juxtaposed with the fact that the requested item is delivered right at the doorsteps of the consumer makes the buy from the platform all the more attractive. But, there is a darker side to it. A close look at the very dynamics of how such heavy discounts are given would show it up.
At the very outset, it is important to understand that MRP is expected to include the reasonable cost of production and distribution plus margin/commission of the retailer/dealer plus applicable taxes and duties. In a typical market based environment [with no government intervention in any manner whatsoever], various suppliers may have different prices depending on their cost advantage.
But, once the MRP is fixed, any discount on this can be limited to a few percentage points as this could come only by way of the dealer [either at wholesale or retail level] sacrificing a portion of his margin/commission. There is no way that a seller could carve out a discount as high as up to 50% of MRP even if he sacrifices the whole of his margin which is hypothetical. Who then is funding these deep discounts?
This could either come from the manufacturer of the product or the e-commerce company which is either selling on its own or facilitating sale on its platform. The former obviously cannot do it as in that case he would be incurring huge loss and eventually may have to close the factory. As regards the latter, it is well known that such companies are having an ‘unrestricted’ and ‘unconditional’ access to FDI [foreign direct investment] which is used [rather misused] to fund the abnormal/hefty discounts.
But, why should foreign investors funnel dollars only to let the recipient burn the cash [a jargon used with much fanfare]? What could be their game plan?
One can think of two scenario. First, as a major stakeholder in the e-commerce company, the foreign investor uses deep discount to garner a sizeable share of the market in the short-run and once his near monopoly [if not complete monopoly] is established, in the medium to long-run, charge high prices to not only recover the loss incurred in the initial years but also, make super-normal profit. Clearly, the consumers will be at a loss over a longer time horizon.
Second, the investor pumps in dollars with the sole intent of boosting the valuation of such companies [never mind if the money is lost] so that at an appropriate moment, he sells his holding and gets away with hefty capital gains. His gain is the corresponding loss of those investors – millions of domestic retail investors included – who buy these shares and may get stuck with them even as the market value erodes as the fundamentals of the entity remain weak.
In the ultimate analysis, without doubt, millions of Indians – both consumers and small investors – stand to lose. This indeed is the darker side which is hidden in the glitter of consumers getting access to products at discounts or investors being lured by high valuation of e-commerce companies. This brings us to the larger question of the policy of permitting FDI in e-commerce which has played a key role in giving a fillip to such unethical practices.
During 2016-17, the government notified guidelines to allow 100% FDI in so called ‘market-place’ model – defined as an IT platform where sellers and buyers conduct transactions. The permission is subject to conditions viz. not more than 25% sale by a single vendor, no advertisements or discounts etc. However, in ‘inventory’ based model of e-commerce where the company also owns the inventory of goods and services, FDI is prohibited.
The line of demarcation between the two models is very thin and yet the implication for FDI under each is far reaching. Whereas, in ‘market-place’ model, 100% FDI is allowed, in an ‘inventory-based model’, FDI is completely barred. This gives a strong incentive to an entity operating the latter to camouflage itself under the former and avail of 100% FDI. The riders on entities operating on market place are meant to ensure that such misuse does not happen but those are rarely complied even as enforcement is poor.
The policy on FDI puts e-commerce players in a vantage position vis-à-vis entities operating on physical formats [or brick-and-mortar]. For the latter, 51% FDI is allowed subject to the investor sourcing 30% of the requirements locally, minimum investment of US$ 100 million and prior approval of the state. This effectively bars foreign investment in this segment. The decision of the government to allow 100% FDI in retailing of food only [via 2016-17 budget] has added to the policy distortion.
The government also allows 100% FDI in single brand retail [SBR] subject to the foreign investor sourcing 30% of its requirements from local vendors. Such investor can also conduct on-line sales. However, a further differentiation is created by relaxing the 30% local sourcing if investment is made in a high-tech area. That leaves lot of room for the bureaucrat to exercise discretion.
Unlike the international practice wherein retail is treated as a single homogeneous sector, in India, the government treats different segments of retail differently for the purpose of FDI. Without doubt, e-commerce segment gets the most favored treatment which is also the prime reason for flood of dollars in to it – a good slice of this is wasted in giving discounts. It destroys market decorum, causes heart burn among industry players and avoidable litigation.
Modi should put an end to this policy mess by allowing 100% FDI in retail without making any artificial distinctions [single brand or multi-brand; on-line or off-line] and without riders.