E-commerce vs brick-and-mortar: Govt’s intentions to ensure level playing field good, but may impact foreign entities

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Published: October 25, 2019 2:49 AM

Govt’s intentions seem good to ensure a level playing field for the brick-and-mortar retail shops, but the impact that this may have on foreign entities is concerning.

Therefore, the approach should be of welcoming foreign capital, and not of looking at business operations with an eye of suspicion.

Arguably, if there is any sector with FDI that is looked upon with suspicion and scepticism, it is e-commerce. In yet another blow to the FDI funded e-commerce global entities operating in India, the government, in order to check that FDI rules have not been flouted, has sought some critical information from these entities. The government wants to know the names of top five vendors selling goods on these entities’ e-commerce platform, the price at which the goods are offered by the vendors, their capital structure, business model and inventory management system. It is not the first time that the government has moved against these e-commerce entities. Whenever any complaint is filed by retailer associations; the government acts swiftly against these entities.

To be sure, the FDI rules clearly permit FDI up to 100% under automatic route in the marketplace model of e-commerce. The rule allowing 100% FDI comes with strings attached that the e-commerce entities need to comply with. The last major tweak to the FDI rules (seemingly at the behest of the traders’ association!) was made in February earlier this year. A critical condition was added to the policy that debarred e-commerce entities from exercising any ownership and control on the inventory sold on their platforms.

To give teeth to this stringent rule, the policy provides that a vendor’s inventory that is sold on the e-commerce platform will mean to be under the e-commerce entity’s control if that vendor procures its inventory in excess of 25% from either that e-commerce entity or any of its group companies. This policy change was needed to ensure that the e-commerce entity should not, through a controlled vendor, indirectly sell its own goods on its own platform and thus circumvent the FDI law on marketplace model of e-commerce. A separate condition in the rules prohibits a vendor from selling any product on the e-commerce platform of an entity which has any equity stake in that vendor. Further, the e-commerce entities are not allowed to influence the sale price of the goods such that a level playing field is ensured for all the vendors. This means that e-commerce entities cannot encourage giving discounts unless the discounts are offered by the vendors themselves.

The government now, on the complaint of traders’ association, wants to test if these rules have been violated. Something may or may not come out of this. The government’s intentions seem good to ensure a level playing field for the brick-and-mortar retail shops and these entities may emerge clean, but what is concerning is the impact that this action may have on foreign entities doing business in India. We must not forget that India has impressively climbed several places up in the latest World Bank’s Ease of Doing Business 2020 survey and now stands at rank 63 (a remarkable climb of 14 rungs over the last year and 79 over the last five years). The government is determined to improve this further and bring India’s rank to top 50. But, such signals could prove to be retrogressive for any serious attempts at improving the ranking. The parameters that are used for the rankings do not take into account the effects of investigative actions of the government, but the global perception that India is becoming an easy place to do business could get a big blow. So, such actions are best avoided, particularly at a time when the government itself has promised to make India a better place to do business.

Considerable efforts are being made to attract more FDI at the time of a slowing economy, and also at a time when India wants to project itself as an alternate to China after the US-China trade rift. Therefore, the approach should be of welcoming foreign capital, and not of looking at business operations with an eye of suspicion.

If the year gone by is any basis for this, then clearly, the outlook doesn’t seem to be optimistic. Constant tweaking of law for this sector will add to the uncertainty. This could result in flight of capital from India being considered as an unfriendly business environment. Several large global online e-commerce players planning their India entry would be closely monitoring these developments in India. The giant multinationals, not only in e-commerce space but across sectors that are looking to set up or expand operations in India, should not get any impression that India is becoming a tough place to do business.

Although the World Bank’s report does not consider such situations of government action fuelled by some traders’ lobby in its ranking and hence this issue is not reflected in India’s latest ranking, still business entities on the ground could get severely affected.
To climb up in rankings, a greater certainty is needed for doing business.

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