The Confederation of All India Traders [CAIT] [it represents millions of small traders who are not only a major source of employment but also is a constituency which Modi – dispensation can’t afford to ignore from a political perspective] has complained to the government that global e-commerce majors viz. Amazon, Flipkart are giving huge discounts, selling exclusive brands [including their own] and controlling inventory of sellers etc – all of which is prohibited under the extant policy on foreign direct investment [FDI].
Promising action, the minister for commerce and industry, Piyush Goyal has already ordered collection of data on their financials, business model and operating practices. Meanwhile, it is necessary to analyze whether the FDI rules are really being flouted.
The e-commerce majors rebut the charge saying that they are able to give discounts because they source products directly from manufacturers ; maintain large warehouses and other infrastructure viz. logistics, handling etc and leverage economies of scale in operations leading to lower cost. This argument is not sustainable.
According to the annual financial statement filed by its Singapore holding company, during the year ending 31 March 2018, Flipkart incurred loss of about Rs 46,900 crore [US$6.6 billion] on total revenue of Rs 30,164 crore [$4.2 billion]. During the year ending 31 March 2019, it registered loss of Rs 17,231 crore [US$2.43 billion] on total revenue of Rs 42,878 crore [US$6 billion].
If, a firm incurs loss of a whopping over 1.5 times the revenue during 2017-18 [though declined to 40% in 2018-19, it was still unconscionably high], this shows that it was giving steep discount [or ‘burning cash’] totally unrelated to cost as argued. It is abundantly clear that e-commerce majors were merely pumping funds [from their global operations] to sell products at throwaway price.
But, why would the companies indulge in such a bizarre practice? As the adage goes, ‘there are no free lunches’. If, today, Amazon can deliver a TV set at 1/4th its normal price, it is foolish for consumers to think that this will be a sustainable scenario. The companies are doing it only to gain a foothold in the Indian market and create monopolies. Having done it, in future, they would fleece the consumers by charging exorbitant price.
But, all of this sounds anomalous the moment one takes cognizance of the fact that under the guidelines on FDI in e-commerce [issued in 2016-17, Press Note 3], 100% FDI is permitted in the ‘market-place’. The market-place is a platform where sellers and buyers meet to conduct sale and purchase transactions even as the owner of market-place merely acts as a facilitator. It can provide services such as book orders, raise invoice, arrange delivery, accept payments, handle rejections, provide warehousing support etc but can’t own and control inventory. Put simply, it can’t undertake ‘direct selling’.
Going strictly by the intent of the policy, the e-commerce company can only play the role of a service provider. It is no different than say a transporter who arranges for movement of goods from one location to another; or a warehouse owner who provides storage space and charges rent with the only difference that this company provides all these services under one roof. Merely by doing so or ‘aggregating’ these services, the fundamental character of it being a service provider only won’t change. It is not expected to give discounts. It can’t own and have control over the inventory. It can’t advertise. And, it can’t promote exclusive brands?
Yet, it is no secret that Flipkart, Amazon et al are indulging in all these practices which can only be done by manufacturer/seller; certainly not by the former who are ‘marketplace’ owners [a sophisticated nomenclature for service provider]. They are violating the policy both in letter and spirit. This is happening ever since the policy guidelines were notified over three years back.
Why then, the government allowed things to linger on? Why did it not pay heed to the complaints submitted by CAIT earlier? Why has it swung into action only now?
This has to do with the guidelines [PN-3] which were vague. These did not clearly define as to what constitutes ‘ownership’ and ‘control’ of the inventory. Apart from stressing that marketplace owner can’t influence price [direct or indirect], no advertisement, these only stipulated that ‘no single seller could account for more than 25% of total sales on the marketplace’. This condition meant that a subsidiary of the marketplace owner or its joint venture with an Indian company could control up to 25% of sales on the platform. Put simply, four such entities could control all of the sales.
Any violation or otherwise has to be seen in relation to what is there in the rule book. Going by this, e-commerce majors were not violating the guidelines. Hence, there was no need for action.
On December 26, 2018, the government issued a clarification to say that ‘the owner of market-place or its subsidiary or its joint venture with Indian company can’t have ownership of the seller’. Further, it said ‘a seller/firm on e-commerce platform can’t source more than 25% of its inventory from a firm connected with the latter’.
These stipulations touch upon ownership and control. But, both are amenable to circumvention. For instance, the platform owner can have less than 50% shareholding in the seller firm and get around by arguing that he does not have majority ownership and control over the latter. Likewise, he/she can arrange for its wholesale arms to continue supplies to the seller while remaining well within the prescribed threshold of 25%. To ensure that an overwhelming share of sales made from the platform originate from entities linked to it, all that it needs to do is to have tie up with more sellers.
When, e-commerce majors are complying with rule book, the question of taking any action does not arise. All the noise about initiating action against them is rhetoric merely to assuage the small traders. Instead, the government needs to worry about what CEO Walmart recently termed as ‘retrospective’ changes in the policy on FDI. The latter was referring to December 26, 2018 clarification which looks like bringing about a fundamental change in the policy.
It is abundantly clear that the real intent of Modi – government is to allow 100% FDI in Indian retail. However, fearing that small traders would be up in arms [a lingering concern that they would lose from opening up of retail to foreign investment is totally misplaced], it has innovated the ‘marketplace’ to camouflage the real intent. This has done no good to any stakeholder; but has only added to the confusion and created uncertainty of the policy environment.
The government should shun the marketplace model and allow foreign investment from the ‘front door’. It should allow 100% FDI in retail – for both online and offline in all sectors without any discrimination or favor. This will provide stability of the policy environment and create a level playing field for all stakeholders. It is in the best interest of small traders as it will lead to all round development of the infrastructure and wide range of choice for sourcing products. It will be pro-consumer in the long-run with many players catering to their needs at competitive/affordable price.