Draft Indian Ecommerce Policy: Favouring Domestic Players At The Cost Of The Ecosystem

One of the biggest blunders of the Nehruvian era was the initiation of the License Raj (in the name of protectionism), a term used to describe the system of licences, regulations, and accompanying red tape that were required to set up and run businesses in India between 1947 and 1990. This paralysed the Indian economy, limiting the scope of FDI for decades.

Today, more than 70 years since Independence, it looks like we’re going back to the license era. PM Narendra Modi’s government seems to have a rising interest and ‘greed’ in accessing people’s personal data, as and when it needs (disguised in the garb of ‘security urgencies’), as is clear from the draft Personal Data Protection Bill (PDP Bill) and the draft ecommerce policy.

Personal data security is not the only issue at stake. The draft ecommerce policy makes several random proposals such as making the National Payments Corporation of India (NCPI)’s RuPay card (a domestic solution/alternate to Visa and Mastercard) mandatory for payments gateways. It also suggests the creation of a government-aided ecommerce platform to promote micro, small and medium enterprises (MSMEs).

However, creating another ecommerce platform won’t solve MSMEs’ problems — what they need is a level playing field and infrastructure, efficient supply chains, manufacturing support, and a fair GST regime to be able to remain in business or join ecommerce sites as vendors.

Similarly, making RuPay card the mandatory payment gateway is going to add to the troubles of ecommerce platforms as gateways are usually decided based on the target audience. Moreover, the move is restrictive and makes it seem as if RuPay is unable to compete with Visa and Mastercard in an open market.

These and many more “suggestions” in the draft ecommerce policy make it apparent that its technology-related policy initiatives notwithstanding, the Modi government is more inclined towards the License Raj than a forward-looking approach.

How? This is exactly what we will discuss in this article.

Indian Ecommerce: A Sinking Boat?

In spite of the country having about 400 Mn Internet users, the Indian ecommerce market is way too young to merit comparisons with the Chinese and US markets. Its annual turnover — $33 Bn — is still significantly lower than what Chinese ecommerce players sell on Singles Day ($45 Bn) alone.

However, it is difficult to reconcile the growth projections of the Economic Survey data with the Morgan Stanley report. While the Survey marks the growth rate at 19.1%, to arrive at Morgan Stanley’s target of $200 Bn by 2026, the growth rate needs to be higher than 30%.

Even with global retail giants such as Walmart and Amazon betting big on India, the ecommerce market here has been a sinking boat at large.

With sales being heavily dependent on deep discounts and free delivery models in a price-conscious market, most big ecommerce players — Amazon, Flipkart, and Snapdeal — have continuously reported huge losses. So much so that Snapdeal, which once was the second-largest ecommerce platforms in the country, is now on the verge of shutting down its operations. (However, this year, the company claimed to have become cash flow positive.)

Flipkart, which was recently acquired by Walmart, registered $1.25 Bn (INR 8,771 Cr) losses in FY17, a staggering 68% increase in its losses compared to FY16. Amazon India is in similar waters, with its FY 17 losses increasing to $692 Mn (INR 4,830.6 Cr) from $527 Mn (INR 3,679 Cr) in FY16, a 31% increase.

The silver lining for the industry is that despite facing heavy losses, Indian ecommerce has been thriving owing to the continuous inflow of funds from foreign players and investors. Clearly, they’ve spotted some treasure at the bottom of the sinking boat.

But, does the draft national ecommerce policy do enough to ensure justice to their investments? Does the Indian startup ecosystem have late-stage investors like in China to take on foreign investors? Do the MSMEs that the government wants to promote have the infrastructure and supply chain facilities to sell independently? The policy neglects a number of issues that are core to the Indian ecommerce ecosystem.

The Draft Ecommerce Policy: Too Late, Too Loaded

The central government, led by PM Modi, had promised to introduce an ecommerce-friendly policy back in 2014 when it came to power. However, it’s only after four years that the government set up a task force under the guidance of a 70-member think tank headed by the minister for commerce and industry, Suresh Prabhu.

Besides Prabhu, the ecommerce think tank included officials from the ministries of finance, home affairs, corporate affairs, and electronics and information technology, among others. It also comprised representatives of the telecom, IT, and ecommerce industries, from companies such as Bharti Enterprises, Reliance Jio, TCS, Wipro, Ola, Snapdeal, Makemytrip, UrbanClap, Justdial, PepperFry, and Practo.

Among the notable suggestions that the task force made in its first copy of the ecommerce policy draft are:

• FDI: Up to 49% foreign direct investment (FDI) may be allowed in inventory based e-commerce companies with a condition that the e-tailer sells 100% Made-in-India products. This will allow ecommerce firms to offer their own brands as long as they are made in India. It is also suggested that foreign ecommerce websites be brought on a level playing field with their Indian counterparts.
• Marketplace restrictions: Ecommerce marketplaces will no longer be allowed to offer deep discounts through their in-house companies listed as sellers. In fact, the policy framework recommends to put a sunset clause on discounts to prevent platforms from directly or indirectly influencing the prices of goods and services. Bulk purchases of branded goods by related party sellers, which lead to price distortions in a marketplace, will be prohibited.
• Made in India push: The sale of domestically produced goods through online platforms would be promoted by allowing limited inventory-based B2C model, wherein 100% made in India products would be sold through platforms whose founder/ promoter would be a resident Indian, the platform company would be controlled by Indian management and foreign equity would not exceed 49%.
• Consumer protection: To provide a forum for consumers, the task force suggested a Central Consumer Protection Authority (CCPA). This, besides helping protect consumers’ interests, will act as the nodal agency for intra-government coordination. It will also provide a platform for e-commerce operators to register complaints of fraudulent activities.
• Redressal: The draft suggests a separate wing to be set up in the Enforcement Directorate. This wing will handle grievances related to guidelines for foreign investments in ecommerce.
• Payments: To detect frauds in cash-on-delivery transactions, the task force has suggested the creation of a counter-fraud, intelligence-based authentication mechanism. The draft also makes it mandatory for ecommerce platforms to add a payments facility via the homegrown RuPay cards.
• More power to founders: The draft policy seeks to give more control and power to the founders of ecommerce businesses, rather than investors. Article 2.19 of the policy framework avers that “the need to amend relevant provisions of the Companies Act so as to facilitate founders to have control over their e-commerce companies despite having a small shareholding, will be examined in the light of the experience of their utilisation by e-commerce companies.”

International Context: Where Is The Balancing Act?

India is not the first, nor the last to seek to protect domestic companies in its ecommerce policy. A number of countries such as China and Vietnam have taken policy initiatives to promote domestic players. China, being an early entrant, played it differently and succeeded in dictating her terms for foreign players. This is one of the biggest reasons that Amazon’s market share could hardly increase from 0.7% there.

International attention has been focused on India, what with giants such as Amazon and Walmart betting big in India. But the draft Indian ecommerce policy, in its bid to favour domestic players, fails to address other concerns such as one arising from the World Trade Organisation (WTO), which clearly is not in favour of data localisation and domestic preference.

A group of 71 WTO countries has launched intensive discussions on ecommerce and also met for the first time in Geneva with 13 other delegations. India has chosen to be an observer instead of a member of the group, as membership may hinder the government’s ability to promote and support the domestic industry.

However, India is actively engaged in bilateral and regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and ecommerce has been a key component of such agreements.

The Indian Council for Research On International Economic Relations (ICRIER), in its Working Paper No 354, Trade Rules in Ecommerce: WTO and India, had highlighted, “Regulations are needed for consumer protection and national security. It is, therefore, important to have “smart” regulations to protect domestic interest. The government should support domestic players through appropriate regulations. But such regulations should not counter WTO commitments. For example, while a subsidy contingent of export performance or on the use of domestic goods over imported goods can be prohibited under the WTO’s Agreement on Subsidies and Countervailing Measures, the government can give subsidies for additional employment creation or for technological upgradation in a smart way which can benefit the industry.”

In the times o’ Trump, it may not be that easy to fully concentrate inward without looking outward. The ICRIER report also raises concerns through the US non-paper proposal on prevention of localisation barriers. The Office of the United States Trade Representative (USTR, 2017) report on foreign trade barriers lists a number of Indian policies that may impose localisation restrictions. And, as we have seen lately, the trade war between the US and India in terms of increased tariffs, the bloodbath could extend to ecommerce as well.

Now, with the first copy of the draft Ecommerce policy out, Amazon and Walmart feel the proposed policy is “heavily tilted” against foreign firms and are likely to ask the US government to reach out to Indian policymakers in case the final policy is “not moderated”.

This is important, as Amazon and Walmart (through Flipkart), both US companies, hold over 70% of the Indian ecommerce market share.

Poser To Indian Government: Why Interfere When You Could Guide The Way?

The Modi government, which once supported and campaigned for the idea of “Minimum government, maximum governance,” currently has 77 ministers in its cabinet — just five less than the maximum number allowed in the Constitution and 12 more than its predecessor.

The drafts of the ecommerce policy and PDP Bill recommend the setting up of regulatory authorities in their corresponding areas. Instating more regulatory boards is hardly an example of minimum governance.

Responding to the criticism on the Bill, Vinit Goenka, a member of the Governing Council of the Centre For Railway Information Systems (CRIS), ministry of railways, and a member of the ecommerce task force (IT), writes, “The long-term vision behind the draft ecommerce policy needs to be recognised and the government should get the support it deserves to make it a reality.”

The long-term vision of the draft Ecommerce policy is “freeing India from the clutches of multinational corporations and reclaiming the country in its true glory.” By leaving foreign players out in the cold.

He adds, “If one is still not convinced about the benefits of the policy, then the case of how big pharmaceutical companies capitalized and cartelized penicillin may be recalled. A life-saving drug was long denied to the developing countries for profit mongering. In the Indian context, simpler examples would be that of the airline, cement, and mobile cartels that resort to peak pricing to increase their profits. The time has come to free India from the clutches of multinational corporations and reclaim the country in its true glory. Self-reliance has always been the soul of the Indian economy and if the draft economic policy goes through, it will take the country to heights that have never been scaled before.”

However, the problem with analogues is that they don’t help in resolving actual, existing issues. The draft ecommerce policy’s promotion of the License Raj in the name of protectionism raises a big question on the efficiency and intention of the government.

The draft also suggests the creation of a separate ecommerce platform in public-private-partnership (PPP) mode to promote MSMEs.

Why does the government want to invest in such unnecessary things?

Also, it’s is a misinterpretation of what MSMEs need. The problem was never the lack of an ecommerce platform — it was the lack of a level playing field, as big platforms aggressively promote their private labels, keeping others hidden behind weblinks. The draft has touched on these problems by proposing measures such as a sunset clause on discount offers, domestic clause (Made in India) products promotional measures, but missed to address the larger issues.

Most Indian MSMEs have been struggling to produce at scale and lack efficiency owing to the lack of manufacturing infrastructure. In western countries such as the UK and the Netherlands, the governments have promoted an ecosystem of readymade manufacturing centres at subsidised rate (for MSMEs) that help startups and MSMEs produce on a large scale with efficiency while keeping costs optimised.

The Indian government has also proposed building data centres in PPP. Theoretically, this may help build the big data infrastructure that could further help in data localisation. However, when was the last time a PPP project created a success story in India? We all know the fate of Modi’s dream projects — GIFT, Gujarat; Smart Cities; the Clean Ganga project, and Vajpayee’s special economic zone (SEZ) projects — all of which failed to make any real impact in their respective spheres.

In short, PPP projects are not ecosystem enablers — they look good on paper, but hardly get implemented on ground.

The next point touched by the draft ecommerce policy framework is data localisation. Article 2.4 of the draft Bill mandates companies to store all data relating to Indian users locally and says their source codes must be audited as well.

However, the same Article adds, “The Government would have access to data stored in India for national security and public policy objectives subject to rules related to privacy, consent etc.”

With amplified misuses of Acts such as the National Security Act, 1980 and Section 66A of the IT Act having been recorded time and again, why does the government still want a free access to personal user data? Instead of having a clause defining situations in which the personal data stored by ecommerce companies becomes a threat to national security, the draft has been kept vague, prioritising the government’s interest. It conveniently ignores issues such as how will ecommerce platforms meet the data localisation demand, considering that the infrastructure for big data and analytics is still very poor across the country.

What the draft ecommerce policy could’ve done instead is make companies that process and collect data liable for all data transactions at every stage. This would have tackled the issue of data security better and eased the burden of data localisation.

Also, making a separate regulatory authority for everything — a Central Consumer Protection Authority (CCPA), a Data Protection Authority (as per the PDP Bill) — won’t really help ease of doing business in ecommerce, as the government expects. In fact, with existing regimes and authorities such as the Income Tax department, Goods and Services Tax (GST), the National Anti-Profiteering Authority, etc, it is only likely to cause further hurdles.

Draft Ecommerce Policy: The Streisand Effect

In the last couple of years, Indian ecommerce companies, despite having staggering losses, have managed to keep their revenues up and have increased their collective customer base to over 100 Mn. The ecommerce model, which was initially meant to target only upper middle class buyers who had online reach, has now been disrupted, thanks to heavy discounts, better supply chain networks, and rising Internet users across socio-economic classes and geographies.

However, Indian consumers at large are said to be very price sensitive as compared to many other countries. Any price surge in online products (or even lack of deep discounts) is likely to result in a sizeable chunk of users sliding away from these platforms. And, to the worry of ecommerce companies, the regulatory measures proposed in the draft are expected to hit prices negatively.

Speaking of the Indian ecommerce ecosystem, small traders not getting apt promotional spaces on ecommerce platforms is just one of the problems. Lack of effective supply chains, warehousing, cold storage, and data connectivity are some of the other major, but overlooked, problems. The ministry of commerce and industry is yet to connect the dots in these areas, as far as policies are concerned.

After the existing copy of the draft ecommerce policy got leaked, the minister of commerce tweeted, “The Ministry had received few concerns regarding the draft e-Commerce Policy following which CIM @sureshpprabhu has directed officials to conduct another round of consultations with stakeholders to address them. The Minister will personally review the draft once it is prepared.”

However, no adequate discussions among the think tank members. A NITI Aayog officer, on the condition of anonymity, even told Inc42, “It wasn’t just about the ecommerce policies. It was meant to pacify certain wings such as Swadeshi Jagran Manch (SJM), Confederation of All India Traders and therefore was leaked purposely. Considering it constituted the think tank and task force after being in power for four years, there are serious doubts over the intention to draft an effective and balanced policy. Drafts like the PDP Bill and now the ecommerce policy are just part of electoral preparations.”

There are still two sessions — the winter session and the interim Budget session — of the Parliament to be conducted before the government announces the general election. While the draft ecommerce policy is yet to be fine-tuned, the sincerity of this government will be marked by whether or not it actually gets the policy implemented. And in what form. Coloured by protectionism or waving the white flag of free trade.