The Prime Minister has set out a vision to double India’s economy to $5 trillion by 2025 from $2.5 trillion in 2020. India’s retail sector accounts for $850 billion, employs 50 million people and more importantly connects India’s ecosystem of 30 million small and medium businesses (SMB) to its customers. It is therefore axiomatic that the retail sector has to play an important role to play in realizing the economic vision for our country.
A key deliverables for retail sector are to grow in nominal terms at 2X the growth rate of the economy (at 15%+ pa). In doing so, any economic policy for the retail sector must create gainful employment that can absorb the growth in India’s jobseekers (forecast at 30 million per year), accelerate conversion of India’s unorganized sector into organized sector to boost its tax collection base, lead to creation of better infrastructure for its citizens and responsibly fulfill their material aspirations. A healthy and vibrant retail sector would also accelerate India’s exports, catalyze the health of the SMB ecosystem and provide a ready market for domestic manufacturing.
So what would such a policy look like?
First, the emphasis needs to be on growing the sector, not regulating it. The economic policy must set targets for growth for ecommerce (say, 30% CAGR) and growth of overall retail (say, 15% CAGR). Second, the economic policy must measure and set goals for employment creation. Third, the economic policy must define and plan for specific areas of infrastructure that need to be developed to serve retail and SMBs and encourage capital investment – both foreign as well as domestic.
Let’s cover growth. Technology, specifically digital technology will enable growth of retail – not just ecommerce – and this has been proven in both China and the western world. Retail policy should ease friction to digitization. Current regulations on taxation disincentivize offline retailers from digitizing and coming online by perversely imposing a more discriminatory and onerous taxation regime on them. To digitize and sell online, small and medium businesses are forced to seek separate tax registration in every state and accept having their cash flows blocked due to withholding taxes that their peers who have chosen not to digitize don’t have to bear.
A policy that seeks to grow the retail or ecommerce sector must embrace an objective to remove this friction and level the playing field.
Next, let’s consider what the policy can do to further accelerate employment in the ecommerce sector. Ecommerce/retail creates a gig workers economy. Employers of frontline workers, especially gig workers face added costs of background verification and sourcing supply from disparate labour pools. The policy could create a national labour exchange and simplify background verification through Aadhaar.
Infrastructure needed for ecommerce comprises warehouse, transportation and payments. Public sector units (PSUs), railways, ports, postal department, airports and defence establishments own large tracts of unutilized land or warehouse infrastructure that can be monetized through win-win arrangements with ecommerce operators. Railways should set goals and create special corridors or run special trains for ecommerce and also earn additional income. Upcoming regulations on payments are likely to add more friction, not reduce friction, through a number of measures that are being pushed through without consultation or adequate change management. Instead, the policy should facilitate enabling payment inventions such as allowing access to credit and Aadhaar databases, removing OTP for online transactions subject to mitigating controls and allowing ecommerce players to extend credit to customers. Such salubrious policy goals would make ecommerce more inclusive and accessible to a wider set of population thus expanding the pool of transacting customers and creating a verifiable electronic trail for purchases that would also boost tax collections.
Globally, ecommerce is proven to boost exports. Regulations that govern exports in India, including documentation for physical flow of shipments and inward remittances were designed for the pre-electronic era. This makes them unfriendly to ecommerce - small packages, low ticket values, B2C orders, handling of rejects and returns and a need for faster shipment speeds. The retail policy should set goals to draft regulations that is specifically geared to incentivize exports through addressing these areas of friction.
A significant lacunae in current thinking is to treat ecommerce as a distinct industry that ostensibly seeks to regulate it through a separate policy. Unlike, say, telecom or IT, ecommerce does not create a new class of products or services. Instead, it merely uses technology to deliver existing products or services more efficiently. Technology is all pervasive and will/should be deployed by offline retailers too. Likewise, customers seamlessly flit between the physical world and the online world in their stages of making a purchase – search, discovery, research, price comparison, installation, after sales warranty and maintenance and repeat purchase. By seeking to have a separate policy for ecommerce that excludes physical retail, there is a risk of creating artificial constructs that would complicate ease of doing business and add costs.
In summary, retail sits at the centre of India’s economy. A policy that accelerates growth of retail could transform the way India buys and sells, thereby transform lives of customers and stakeholders and thus transform India itself. A constructive policy can accelerate the transformation of India into an economic superpower; equally, an ill-thought or regressive policy can retard that transformation.
For the sake of future generations, we hope it is the former and not the latter.
(Raghava Rao is VP, Finance, Amazon India.)
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