Dispelling myths about capital dumping would serve India well
PremiumForeign e-commerce players that are delivering broad economic benefits with their investments have falsely been accused of it
An interesting—and dangerous—allegation going around is that foreign e-commerce marketplaces indulge in ‘capital dumping’. It’s interesting, as it’s typically levelled by interest groups close to firms that are raising exorbitant foreign capital. It’s harmful to national interest for deliberately distorting ground realities. It’s dangerous because India needs more foreign capital—not less—to create jobs, strengthen infrastructure and empower Indian small and medium businesses and entrepreneurship with tech innovation to accelerate economic growth.
Let’s talk economic growth. Prime Minister Narendra Modi has set a goal to grow our gross domestic product (GDP) at 9% per annum. Macro- economics teaches us that capital investment is needed to drive economic growth. The incremental capital output ratio (ICOR) for an economy refers to the units of capital needed to drive one unit of growth. India’s ICOR of about 4.5 (source: Reserve Bank of India) translates to a capital investment requirement of 40% (9%x4.5) of GDP. India’s domestic savings rate, a measure of our domestic investment capacity, hovers at around 28% of GDP (source: World Bank). Domestic sources thus cannot fully supply the capital we need for growth. A large part of this deficit of 12% of GDP must be funded by foreign capital inflows. Even for 6.8% GDP growth, a Confederation of Indian Industry-Ernst & Young study estimated that India would need $120-$160 billion in foreign direct investment every year.
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Now let’s talk jobs. Capital is needed to fund enterprises that create jobs for our youth—about 8-12 million youth enter the workforce every year. A Nasscom study projects that e-commerce (including partnerships) will create 12 million new jobs between 2020 and 2030. For small businesses to flourish, we need capital and technology to build physical warehousing and transport infrastructure, as also a robust digital payments set-up.
One fallacy, based on a ‘fixed pie’ mindset, is that ‘capital dumping’ will fuel e-commerce (benefitting foreign companies) at the expense of kirana shops. A Nasscom-Technopak study punctures this view, showing that while e-commerce will grow from $34 billion to $208 billion, general trade will grow from $699 billion to $1,088 billion from 2020 to 2030. So, despite unprecedented e-commerce growth, general trade growth will outshine it by a ratio of 2.2 times (in increased sales).
Since 2015, Amazon has brought in around $6.5 billion and Walmart invested $16 billion; each has annual losses of around $1 billion. These may be large numbers, but not sizeable enough for a $34-billion e-commerce segment (4% of Indian retail) to snuff out $699 billion of general trade (which accounts for 88% of retail).
Moreover, in a country the size and diversity of India, e-commerce and kirana stores serve complementary needs and are hardly in conflict. Also, as customers use the convenience of technology—for safety, as in covid, and for access to broader choice in remote areas—hybrid models are here to stay. Which is why we at Amazon launched our Local Shops programme to draw local physical-shop traders online and build closer partnerships while helping scale up offline stores.
Another concern, that foreign capital is funding ‘deep discounts’ is also unfounded. As India is in a nascent stage of e-commerce growth, companies like Amazon are investing for future growth. These investments are primarily in infrastructure (capital expenditure for warehouses, servers, etc). Operational costs include the cost of hiring software programmers, delivery personnel (who often operate below full-utilization levels as the order density per neighbourhood is still low but orders must be served on time), and also upfront marketing and advertising costs to influence online behaviour (nudging internet browsers to shop) and help local entrepreneurs (sellers) learn and sell online.
The losses borne on all this are akin to capital investment for a new factory for a new product, like a skin cream or TV set. When investment in manufacturing assets and operational losses in initial years are well understood for skin cream or TV manufacturers, why would we frown on an e-commerce marketplace doing the same? Investors in all these cases demand an economic return on their capital within a rational time-frame, with no tolerance for their capital being burnt or ‘dumped’. This investment is not for discounts or to fund losses.
Proponents of ‘capital dumping’ conveniently turn a blind eye to the role that e-commerce—irrespective of its source of capital—plays in economic growth. Besides creating jobs, e-commerce companies help small businesses widen their customer base at low cost, boost tax collections, foster a technology economy, drive exports and fuel consumption. Notably, e-commerce promotes digitization that helps kirana shops modernize and stay resilient.
Partnerships between e-commerce and kirana shops will be the defining paradigm of the coming decade. Additional restrictions on foreign capital in e-commerce could retard the modernization of these kirana shops and slow down offline-online partnerships, which are likely to account for the bulk of employment creation in the coming decade. Regulators must therefore beware the fantastic notion of ‘capital dumping’, else they risk killing the e-commerce goose pregnant with a golden egg.
Lastly, it is amusing that the chant of ‘capital dumping’ is sung by those who have themselves raised record levels of foreign capital. Large Indian retailers now have substantial foreign capital. One of India’s largest retailers with claimed retail revenues in excess of $19 billion, for example, brought in $27 billion of foreign capital but manages the teflon task of having neither its foreign capital nor sheer size called out as a concern for general trade.
It reminds one of a film song that had Salman Khan croon, “Ishq ke naam pe karte sab raas-leela hain. Main karoon, toh saala, character dheela hai." (Roughly: Everyone’s dancing in the name of love, but when I do it, my character is questioned.)
Raghava Rao is vice-president, finance, Amazon India.
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