E-tail’s doing well, wrap it in red-tape!

E-commerce may be one of India’s fastest-growth sectors, both in terms of the foreign investment it is attracting as well as the jobs being created — and the access to a pan-India market for lakhs of SMEs — but that has not stopped the government from constantly trying to put impediments in its way. The latest attempt, a draft e-commerce policy, appears reasonable on the face of it but, should it be implemented, will inject so much bureaucratic control into the sector, it is hard to see it continuing to grow in the manner it is today.

Unlike previous attempts at regulating the sector such as via Press Note 2, on the face of it, the draft e-commerce policy applies to all e-commerce players “with foreign and domestic investments”; Press Note 2, in contrast, applies only to foreign investment like that of Walmart and Amazon. Of course, there is a caveat here since the draft policy also says that “E-Commerce platforms hosted by or on behalf of entities having foreign investment shall comply with Foreign Direct Investment Policy, which shall prevail in case of inconsistencies between the two policies”.

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By putting restrictions on e-commerce players with FDI, that policy (read bit.ly/3s98xCs for more details) essentially ensured there were two sets of rules, one for Indian players and one for foreign players; never mind that the concept of an “Indian” player is itself a nebulous one given how several Indian retailers also have large amounts of FDI even if at the group level; and there is no way to ensure that the FDI invested at the group level does not make its way to the group’s retail venture. Since the assumption behind the policy restrictions on FDI is that big e-commerce chains will kill kirana stores, what this effectively means is that the government doesn’t want Indian kiranas to die at the hands of a Walmart or an Amazon but feels it is ok if this happens at the hands of a Reliance Retail or a Dmart.

On the face of it, many of the stated objectives of the draft policy are not something you can object to; indeed, they are desirable. Asking an e-commerce player to manage its relationship with sellers in such a way that it is not partial to any one of them seems a good thing. But no two sellers anywhere in the world are exactly alike, some are more efficient, some can scale up faster, some are better capitalised, etc. Every company, whether in retail or elsewhere, prioritizes certain vendors/franchisees/distributors depending on their capabilities. Under the new policy, however, some bureaucrat, or the Competition Commission, will actually examine whether the vendor selection policy of the e-commerce entity passes muster! Possibly, an aggrieved party can even approach the court.

Related to this is the clause that says “e-commerce operators shall ensure that algorithms used are not biased and that no discrimination due to digitally induced biases is prevalent”. E-commerce players collect all manner of data from customers, say on the timeliness of a delivery or the quality of a product or the seller’s returns policy, etc; all of that goes into the making of their algorithm. Under the new policy, if any supplier complains that it is not getting the same amount of sales as another, the government can ask the e-tailer for an explanation and even take action against it.
And, probably based on some complaints against a few e-commerce giants in the US—or even some food delivery services—the policy says “information collected through platform is not used to obtain market advantage against sellers on its own platform”. That means if a food delivery company finds out, from its vast database, that burgers priced at Rs 65 sell the best, it should not use this information to make its own burgers that sell at Rs 65; ditto for a marketplace with refrigerators or speakers or some other widget.

Apart from the policy making little sense, will this apply to physical store brands since, in that case too, the store-owner is trying to replace a higher-price brand with a lower-priced in-house one? You can imagine what a bureaucrat’s delight this new clause will be since the e-tailer will have to prove that the in-house brand was not created based on the data collected. This restriction already applies to foreign retailers since Clause 5.5.15.2.4 of Press Note 2 has enough restrictions to ensure no foreign e-tailer can create a store label. In this day and age, why put one set of rules for physical stores and another for virtual ones?

Much of what the policy is trying to fix, as it happens, are issues where governments should have no role in free markets. Why should the government be trying to decide what the level of discount should be (via Press Note 2), how vendors are to be chosen etc? Everywhere in the world, and not just in the retail sector, companies chose their vendors and dealers based on a variety of parameters and these do not have to be justified to the government or some arm of it.

Given the efforts being made by the prime minister to convince investors that his government is going to be very investor-friendly, it is ironic that such a completely statist draft policy has even been put out. At some point, sooner rather than later, the government will have to decide whether it wants FDI to come into the e-commerce sector. It can’t want the benefits—including to lakhs of SMEs who now have access to a pan-Indian market — of the $8-10 billion apiece that a Walmart and an Amazon have brought in to set up world-class warehousing and delivery services while, at the same time, keep throwing all manner of hurdles in the way of these very investors; the Press Note 2 restrictions that actively discriminate against foreign investors only make things worse.