The government must provide a level playing field to all. It should legitimize 100 per cent FDI in retail, online and offline, big and small
Referring to the national e-commerce policy, the Secretary Department for the Promotion of Industry and internal trade (DPIIT) in the Ministry of Commerce Rajesh Kumar Singh has said it will “put in place a streamlined regulatory framework for the ease of doing business, adoption of modern technologies and the integration of supply chains”. It will seek to create “a conducive environment for the overall development of the sector and boost exports”.
According to the foreign trade policy, the Union government is aiming at an e-commerce export potential of $200 billion to $300 billion annually by 2030 which is 10-15 percent of the projected global cross-border e-commerce exports of around US$2 trillion. The claims of a ‘streamlined regulatory framework’ which is fundamental to realizing the goal don’t inspire.
E-commerce is the process of selling goods and services over the Internet. A policy was introduced in early 2016, to allow 100 per cent foreign direct investment (FDI) under the so-called marketplace model. The marketplace is a platform where vendors sell their products to consumers even as its owner merely acts as a facilitator by providing services such as booking orders, raising invoices, arranging the delivery, etc. She can’t hold inventory or undertake direct selling.
Two conditions are prescribed. First, the foreign entity owning marketplace cannot permit more than 25 per cent of total sales on the marketplace from one vendor or its group companies. Two, it cannot directly or indirectly influence the sale price. On December 26, 2018, the commerce ministry clarified “The owner of the marketplace or its subsidiary or its joint venture (JV) with an Indian company can’t have ownership of the seller.”
Further, “a seller on the platform can’t source more than 25 percent of its inventory from a firm connected with the latter.”
In 2020, the Department of Consumer Affairs (DCA), in the Ministry of Consumer Affairs, Food and Public Distribution, issued the Consumer Protection (e-commerce) Rules, under Section 101 of the Consumer Protection Act, 2019. The rules bar affiliated entities from selling on e-commerce platforms, restrict ‘flash sales,’ and disallow sellers from using the name or brand associated with the marketplace e-commerce entities for the promotion of goods.
In 2021, DCA made amendments to restrict business-to-business, or B2B, sales in e-commerce and a provision to prevent an ‘abuse of dominant position’ by e-commerce firms.
Meanwhile, the commerce ministry has come up with a couple of drafts of the e-commerce policy first in 2018; another draft was released in 2019. According to Rajesh Kumar Singh, inter-ministerial consultations are still going on. How can a policy that remains on the drawing board for over five years, is still under deliberation and has no deadline as to when it will be finalized help attract FDI and provide a sustainable basis for the development of the sector?
The delay apart, various contours of the policy that have so far come out send contradictory and confusing signals. The overarching intent behind the 2016 order was that foreign investors won’t be allowed to undertake direct selling. But, its content permitted him to set up four companies (call them subsidiaries or JVs) and control 25 per cent each of total sales on the platform.
Having allowed its entities to control almost all of the sales made on the marketplace, a requirement that the latter can’t directly or indirectly influence the sale price is laughable. By issuing December 26, 2018 clarification, the government almost took a U-turn saying that the subsidiary/JV floated by the owner of the marketplace can’t have ownership of the seller. It is a different matter that foreign investors can circumvent it by having less than 50 per cent shareholding in the seller firm and arguing that they have no control (majority) over the latter.
The second clarification whittled down the 2016 circular but kept a leeway for the marketplace owner to sell his ‘own’ product – albeit through its wholesale arm – on the platform. All that the wholesale arm needs to ensure is to restrict supplies to the seller within the 25 per cent threshold.
The amendments brought by DCA (2020/2021) seek to bar affiliated entities from selling on e-commerce platforms and prevent ‘abuse of dominant position’ by them. When the 2016 circular was already allowing affiliated entities to ‘explicitly’ sell on the platform and even 2018 clarification permitting it in a ‘subtle’ way, how can the subsequent amendments bar it?
Now, the DPIIT is talking about aligning e-commerce policy with the amendments brought by DCA. This would be a gross violation of what the former had done vide its 2016/2018 circulars. It will be tantamount to a retrospective change of policy and send a wrong signal to foreign investors.
When the rules are opaque, every stakeholder picks up what suits it. While, foreign e-commerce giants such as Amazon, and Flipkart say they comply with the law, trade bodies argue that the former are violating FDI rules. This puts even judicial forums in a quandary. Umpteen petitions are pending in the courts. But, there hasn’t been a conclusion of any case either this way or that way.
The commerce ministry is putting together all existing rules to arrive at the policy. But, unless the anomalies in extant rules are removed, the resulting policy and regulatory framework will be far from conducive. We need to get to the root of why the rules were crafted the way they are.
Traditionally, BJP has been opposed to FDI in physical retail fearing that the ubiquitous mom-and-pop store – a colloquialism used to describe small, independent (and often family-owned) businesses – would be threatened by the presence of big retailers in the locality.
This would be amply clear from the stance its leaders took during the parliamentary debates in 2012 when the then UPA – government sought a discussion on allowing 51 per cent FDI in multi-brand retail. Being subject to onerous riders, that was a non-starter.
Yet, it wants that mom and pop get help in procurement, transportation, storage and all other areas required for logistics support. That is where Amazon/Flipkart has an edge. To get them here, Modi – government came up with the idea of a marketplace. But, they won’t come merely to provide services (this is what the marketplace is all about). They needed a foothold in the Indian retail space which was allowed to leverage ‘clever drafting’ of the rules. This has boomeranged.
Amazon/Flipkart et al has occupied disproportionately larger space in online retail leaving small traders high and dry. Even in offline or physical retail, FDI has come surreptitiously despite being barred as per extant policy (2012). For instance, in 2020 Jio Platforms Limited (JPL), a 100 per cent subsidiary of Reliance Industries Limited (RIL) received a foreign investment of Rs 1,50,000 crore (Rs 43,450 crore from US internet major Facebook alone) a major chunk of which was used by JioMart commerce.
JioMart commerce is an e-commerce platform that offers technology-enabled wherewithal to help 30 million stores to deliver products to consumers. It also integrates with itself thousands of retail stores spread all over India operated by Reliance Retail Limited (RRL). RIL having access to FDI in offline retail using the e-commerce marketplace route is outright unfair and discriminatory.
To clear the mess, the government should dispense with the marketplace and legitimize 100 per cent FDI in retail to provide a level playing field to all retailers, online or offline, big or small.
The writer is a policy analyst
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