India is one of the most critical markets for e-commerce. It is a very large and rapidly growing market for online shopping. The growth of the industry has been triggered by increasing internet and smartphone penetration. Internet penetration in India grew from just 4 percent in 2007 to 34.42 percent in 2017. As of December 2018 overall internet penetration in India was 46.13 percent. But there came a drastic change in this flourishing industry which can change the future of e-commerce for Indian and foreign traders and even customers. Let’s have a look at what actually happened.
Earlier this year, the Indian government changed the face of e-commerce. It implemented several restrictive changes to India’s FDI policy for e-commerce. While some called it a game-changer, others criticized it as a nonsensical idea, which will ultimately hurt the consumer. As per the new rules, online marketplaces can no longer enter into deals for selling products on their platforms exclusively nor can they have a single vendor supply more than a quarter of the inventory in a fiscal year. The government also restricted marketplaces from influencing prices in a bid to curb deep discounting.
Before we dig deep into the effects of the policy we need to know that when it comes to e-commerce there are two types of business models — inventory and marketplace.
A marketplace model means that an entity like Amazon or Flipkart can provide a technological platform for the buying and selling of goods and can act as a “facilitator” between a vendor and consumer. An e-commerce platform operating on a marketplace model needs to have IT infrastructure and may provide logistical support to the vendors it hosts. On the other hand, an inventory model is one where the e-commerce company owns the inventory it is selling directly to consumers.
Under the new policy, a company with a marketplace model can’t exercise ownership or control over any inventory bought and sold. If the larger e-commerce platform controls 25% of an online vendor’s inventory or some equity in the vendor’s company, that vendor’s inventory will be deemed controlled by the e-commerce platform, preventing the vendor from selling their products on that site.
You must be wondering how are sites like Amazon are able to sell their products such as Amazon Echo, Amazon fire stick and other products. Initially, as the new e-commerce rules were enforced the site had to take down many products. But to bring them back Amazon had to reduce its shares in the venture to less than 25% in ‘Cloudtail India’(owned by Prione Business Services and Amazon) who is the seller of these products, succeeding in which the products were back. Flipkart also took similar steps.
Another huge change is that e-commerce companies cannot influence the sale price of any goods or services. So it has debarred such online marketplaces from manipulating the price of products or offer deep discounts that helped them lure customers.
Government authorities claim that the new curbs will ensure a level playing field and promote fair competition between different retail channels. The changes are in response to the complaints made by domestic traders against e-commerce players who offer deep discounts to their consumers, using their affiliated and exclusive agreements with global brands.
Any kind of monopoly in the market is harmful in the long run. The company which has full control over the market, won’t have any incentive to innovate and will become stagnant. One-fourth of the Indian online market was dominated by Amazon and Walmart owned Flipkart. But in the wake of new rules imposed by the Government, in the near future, Indian e-commerce companies might boost their growth.
The loss for the customers will be the non-availability discounts, cashback, exclusivity the e-retailers were offering with regard to particular vendors’ products as the new law refrain the sites from giving extensive discounts and reducing their control over the prices of products.
The biggest winners from the new guidelines will be the traditional brick-and-mortar sellers. In the past few years, online marketplaces had hit the brick-and-mortar stores hard. They had started luring away so many customers with discounts and cash backs — and of course, the ease of buying without stepping out — that brick-and-mortar retail was seen to be dying off soon. The new guidelines restricting discounts and cash backs may help brick-and-mortar retailers retain customers.
Apart from these local retailers, small online retail companies (for example, Snapdeal, ShopClues, etc) will also benefit from the policy as they will now be able to compete with the giants.
The new rules are having mixed effects on India. Where on one side it is giving a boost to the conventional offline sellers, smaller sellers online and e-commerce websites who were earlier overshadowed by the big players in the market, but on the other hand, some small sellers would have to compete to enhance production capacity to meet the necessary requirements.
The consumers will also suffer as they will no longer get selective promotional benefits like cash backs and early delivery. Such arbitrary moves by the government are seen to disrupt the existing business structures, hurt business sentiments and eat into the predictability and reliability factors that foreign investors are looking for before investing in India and is seen as a regressive move in the open market by the rest of the world. It will thus discourage foreign investments in an already slow economy. Foreign investors will not be interested in investing in entities over which they have no control and which do not guarantee profits as the giant corporations do. Instead of making the retailers independent and strong enough to compete with MNCs, this policy blocks out the competition in the market and only provides crutches to the local retailers by reduced competition that too in the time of globalization. It will affect foreign investments in the country and thus hamper economic development. The restrictions on them might dampen their business growth and thus reduce jobs. Whether the new e-commerce rules are actually beneficial for the country or not only time will tell.