Revised FDI e-commerce policy could cost India momentum gained from digitisation of small businesses

Updated: May 12, 2019 9:35:54 PM

The new policies could potentially limit the ability of a marketplace to incentivize vendors, especially small vendors, to utilize e-commerce as a means to access new markets.

KPMG estimates indicate that 43 per cent of small businesses in India participate in online sales.

By Dinesh Nandwana

In this era of fragmented production chains and digital commerce, the domino-effect of policies and regulations is greatly amplified. Policies, which address focused-questions within specific markets, have a wider impact on the economy through these industries’ linkages with others. However, these considerations have not been adequately recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) in the wider e-commerce policy that has been floated for consultation or the FDI policy released in December last year. While the policy addresses concern about transparent and fair competition in the e-commerce market, it has not taken into account the interests of many other stakeholders in the industry, such as small businesses.

Limiting Scale

The new policies could potentially limit the ability of a marketplace to incentivize vendors, especially small vendors, to utilize e-commerce as a means to access new markets. This could mean losing the momentum that India has gained in promoting benefits from digitisation to small businesses or SMEs. KPMG estimates indicate that 43 per cent of small businesses in India participate in online sales, recognizing e-commerce as a cost-effective measure to increase sales, expand the business, and generate profits. SMEs which have adopted internet services for business activities have earned 51 per cent higher revenues, which amounts to 49 per cent more profit, 4 per cent higher employment and a 7 per cent wider consumer base than their traditional counterparts, according to a report by FICCI.

Besides the direct impact of e-commerce on industry participants, the industry creates employment and economic value in allied activities as well, such as logistics and digital education. Also, the wave of entrepreneurial efforts, which has been catalyzed by foreign investment in India’s e-commerce market, may get restrained by the new policy framework.

Press Note 2 of 2018 came unexpectedly to an industry that awaited a consultative process on a wider e-commerce policy. The hope was that this process would enable deliberation on the proposed policy as well as the time to align business strategy to accommodate the expected changes. However, the process that was followed lacked consultation with stakeholders.

Wrong Approach

The DPIIT has now, on February 23, floated the wider e-consultation policy for consultation. While the substantive concerns that were previously raised still lack clarity, in process, the new e-commerce policy follows the due process of consultation. However, the wider policy seems largely influenced by the earlier change to the FDI policy.

This consultation process that flows from a predetermined position that India has adopted seems to lack a joint consultative process. To the contrary, the process should have begun with the wider consultation before crystallizing these takeaways into Press Notes or legislation. Without a clear definition of e-commerce, the policy demarcates between inventory-based and marketplace models and encourages FDI in the latter only.

This fails to answer questions on whether the DPIIT sees intelligible differentia between the two and the rationale supporting the differentiation. Further, it also forwards the idea of an integrated system to connect customs, RBI and India Post to better track imports, all of which must be channelized through the customs route. While the objective of cleansing the market of counterfeit goods is commendable, it creates a hurdle to the ease of e-commerce, a benefit that guides investment in the sector. Furthermore, the policy change in FDI does not lose effect with the new consultation, nor is it possible that the Press Note is revised after consultation, regardless of the takeaways.

Democracy, as it has evolved, requires robust processes that are participatory and deliberative. The government recognizes the same, given that its various arms including regulators and ministries regularly undertake public consultation before framing policies. For instance, the Telecom Regulatory Authority of India and the Ministry of Information and Broadcasting, have both opened proposed laws for wider public consultation in recent times. While this engenders civic engagement on one hand, it also informs policymakers of the industry’s perspective. Additionally, industries are able to model a business strategy based on the changes that are expected.

Need for Balancing

While it may be argued that the DPIIT was well within its powers to notify the rules following executive action, the nascent stage and diverse nature of the e-commerce industry should have been accounted for before final notification of the rules. The unintended consequences that are observable today, two weeks into the new regime highlights the level of preparedness the industry found itself with. The industry is certainly in agreement about the need for a new e-commerce policy, however, it was not expected that the industry would wake up to a new notification that contains little clarity while seeking restrictive regulation. Existing and proposed commercial agreements, earnings predictions, as well as efforts to scale operations, have been impacted due to the unpredictable nature of the notification.

Public Policy on e-commerce should be designed to balance the benefits of foreign capital and the presence of large data corporations against remedies necessary to address the shortcomings of the market. This is done best through a consultative process that provides all stakeholders with an opportunity to participate in the law-making process. Indeed, the transformative impact of digitization and e-commerce at the grassroots level is too valuable to lose at the expense of hasty policymaking.

(Dinesh Nandwana is the Executive Chairman at Vakrangee Limited. Views are the author’s own.)

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