New e-tail policy makes little economic sense

By: |
New Delhi | Updated: December 28, 2018 10:20:47 AM

Policy to stop back-door FDI bans commercial tie-ups & even store labels. But unfair to change rules after billions of FDI dollars came in.

FDI in retailE-commerce policy

The government policy on e-tail is the classic example of not holding your nose directly, but instead reaching out from behind your head to try to do so. In the ideal world, as the UPA government had done, the government needed to allow FDI in multi-brand retail; after that, it would be up to firms like Amazon or Walmart to decide how much of the market they would try and capture with traditional brick-and-mortar stores and how much through on-line retailing. Instead, since the BJP was ideologically opposed to FDI in multi-brand retail, it opted for a fudge. FDI was to be allowed in the e-tailing sector, but provided the entity didn’t make any sale to consumers, it made it just to businesses—that is, no B2C, only B2B.

Immediately, big players like Amazon and others flocked to the market to set up structures that, while allowing them to sell to consumers, didn’t break the letter of the law even if they ignored its spirit; one such structure was the ‘marketplace’ model. Ostensibly, an Amazon was not selling to consumers, it was a mere ‘marketplace’ like a shopping mall. Since the FDI was also used to give large discounts, way more than traditional retailers were giving, there was a large protest from smaller shopkeepers, but no serious action was taken by the government all these years.

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With the elections now approaching, perhaps, the government is keen to placate all protesting groups—kirana shops have been a big BJP support base—and has come up with new restrictions. In the past too, there was a stipulation that said not more than 25% of an e-tailer’s sales could come from related entities; in the case of an Amazon that has an investment in Cloudtail, this meant that while all of Cloudtail’s sales could be to Amazon, only a fourth of Amazon’s sales could be from Cloudtail. So, if Amazon was pumping in money to Cloudtail and using this to drive discounts, this was to be restricted. The new guidelines, however, don’t allow any sales from Cloudtail on Amazon—and RetailNet for Flipkart—since Amazon “or its group companies” have an investment in it or “control its inventory”. Apart from the fact that is unfair to clamp down on this while turning a blind eye to all violations in the past, this means even store labels can’t be sold by e-tailers with FDI since, in all probability, these products will be made by firms in which the e-tailer has equity or, more certainly, controls its inventory; as an aside, it is not clear if Amazon can sell its Echo speakers anymore.

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Even odder is the stipulation that e-tailers cannot have exclusive tie-ups of the type many have with mobile phone manufacturers. In today’s world of e-tail, it makes a lot of sense for suppliers, of jeans say, to tie up with an Amazon or a Flipkart and sell their brand on their network instead of through traditional brick-and-mortar stores. The new policy says the product has to be sold on all e-tail platforms, but surely that is a commercial decision? A jeans supplier may want to sell only on Myntra because that has a certain branding and not on Snapdeal. Indeed, this clause hurts the very SMEs the government is trying to help by providing a new marketing channel.

While all these measures are aimed at stopping what is perceived as unhealthy discounting—it is a different matter that big stores also do this—none of the new measures apply to e-tail platforms set up by Indian players like Big Bazaar or Reliance. So, if a Reliance Retail wants to sell massively discounted goods—much like RJio did—this is permissible even if Indian retailers are hit! In fact, if foreign players like Walmart will hit the business of small Indian retailers, so will big Indian retailers like Big Bazaar and Reliance. Any policy that is different for local and foreign players can’t be a good one. In poll season, however, even the Opposition isn’t taking up the issue.

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