The government recently decided to drop the first draft of ecommerce policy and set up a committee of secretaries to decide on a new set of recommendations. Lex Witness brings to you a recap of what have been the thoughts around the first draft of the policy. We analyse the policy to assess its impact on stakeholders in the retail space. The policy in its current form adopts a swadeshi framework prioritizing domestic startups over its international counterparts. Have an interesting read through.
It took years for Indians to put online shopping at par with brick and mortar retail. For several years the country that relied heavily on traditional ways found it disconcerting to switch to an ecommerce model where businesses could be set up online and things could be sold at the click of a mouse. As it stands today, the Indian e-commerce industry that has been on an upward growth trajectory driven by rapid internet penetration is expected to surpass the United States to become the second largest e-commerce market in the world by 2034. With rising internet penetration both in urban and rural areas, India’s internet economy is expected to double from US$125 billion as of April 2017 to US$ 250 billion by 2020 and is majorly backed by e-commerce, according to a report by India Brand Equity Foundation.
What is baffling is that an economy driving sector such as e-commerce until now fell short of being as tightly regulated as one would expect. This is set to change. With the rise in digital transactions through ecommerce over the years, the government found it imperative to regulate the burgeoning sector through the recently drafted e-commerce policy tabled by former commerce secretary, Rita Teotia and submitted before a panel headed by commerce and industry minister, Suresh Prabhu. The draft e-commerce policy seeks to streamline regulation of all aspects of online retail and proposes strict restrictions in the workings of online retail. Curbing discounts and placing restrictions is bound to have implications on key online giants such as Amazon, Google, MakeMyTrip and Flipkart and thousands of sellers. Having a national e-commerce policy will help with coordination between different departments of the government and enable better negotiations on multilateral issues with the World Trade Organization. The government is currently reworking on the draft policy after it drew criticism from various stakeholders but in essence, the framework for regulating the sector has been drawn. Tracing years of regulation in the ecommerce sector takes us back to 2015 when retail associations, the Retailers Association of India (RAI) and the All India Footwear Manufacturers and Retailers Association (AIFMRA) approached the Delhi high court on behalf of brick and mortar retailers claiming that e-commerce companies had undue advantage as they could provide deep discounts through accessing foreign direct investment which traditional retailers could not match. They argued that e-commerce companies were operating in the garb of a marketplace model as India’s policy did not allow them to sell directly to customers. In March 2016, the government allowed 100% FDI in single-brand retail of goods and services through the automatic route to open up the sector to foreign players. It also notified new rules through Press note 3 which prohibited e-commerce marketplaces from offering discounts and capping total sales from a group company or a single vendor at 25%. Originally aimed at ending discount wars, these rules were flouted by online players who continued to lure customers through discounts, leaving offline retailers helpless.
While the draft policy seems promising for boosting the Indian e-commerce sector that was operating in a vacuum until now, it has also seen disapproval for being too “swadeshi” in its approach- something that will hurt international e-commerce businesses. We take a look at how the government intends to regulate the sector and its likely impact on both online and offline stakeholders:
As per the draft policy, all data generated by Indian users from e-commerce platforms must be stored locally. By and large, it puts the government in charge of all user data stored in India for national security and public policy objectives. This falls consistently with the recommendations by the Justice Srikrishna committee that aims at preserving the sanctity and privacy of the Indian user by storing their data on local servers in the country. Lack of clarity in the Srikrishna committee’s report over infrastructural costs associated with setting up domestic data servers was addressed in the draft policy that provides for direct and indirect tax incentives as well as according infrastructure status to data centers. The draft proposes a cooling off period of two years before localization of data becomes mandatory. This move will benefit players in the e-commerce industry by giving them enough time to get accustomed to the prospect of localization of data and set up data centers for such purpose, as first suggested by the Srikrishna committee experts.
“Data localization will create pressure on data storage companies to open data centers locally in India. Considering the security aspect of data as well, it is a good step in the backdrop of global security lapses that have come to light in the past few years”.
According to Raman Jit Singh Cheema, policy director at Access Now, a group campaigning for greater internet freedom, wanting to keep data stored on domestic servers fundamentally serves the interest of creating an economic situation where control remains in Indian hands. He believes that it might be partially to favour certain big tech companies. Cheema is not too sure about how the policy fares when it comes to protecting user interest, “If it’s about centralization of data, does it help centralize it more in Indian hands and in what how is this guaranteed to benefit the Indian user?”
Data localization has received support from industry peers as explained by Devangshu Dutta, CEO of Third Eyesight, a specialist consulting firm in retail and consumer products. According to him, going strictly by a governance perspective, mandatory data localization has only increased around the world in recent years, and it’s not an insurmountable technical or business barrier for foreign e-commerce giants, nor is it a significant competitive advantage for small domestic startups. It also comes with opportunities for data storage and server companies.
Another way to view it is that domestic storage of data will be a double-edged sword as it will work positively for Indian companies and startups but at the same time hamper the prospects of international giants like Google, Amazon that until now were leveraging user data generated through e-commerce platforms, social media and search engines. Taking the lead on this, in a meeting between Google CEO, Sundar Pichai and IT minister, Ravi Shankar Prasad, the international giant has agreed to comply with data localization norms but has sought time until December to do so.
The draft e-commerce policy has sought to create a level playing field in the ecommerce sector through its recommendation of allowing limited inventory based B2C model where locally produced goods can be sold via an online platform. In a bid to push “Made in India” products through companies where control lies in the hands of Indians, typically the micro, small and medium enterprises, it has proposed a 49% FDI through this route. So far, the government had not permitted foreign investment in the inventory-based model. The thought process behind having 49% FDI can be traced to the fact that control should lie in the hands of the founder who are largely Indians in most cases. Since foreign investors cannot contribute beyond 49% in a particular ecommerce platform, the platform ends up
Being in the hands of Indian management. Harboring control in the hands of Indian management may not be as black as white as signaled in the draft policy. “It will be difficult for startups to fund-raise as the draft policy is sending mixed signals to the investors on “ease of doing business” in India. This will also impact investors as it will make it difficult for them to exit from their current investments”, explained consultant Ujjwal Chaudhry of RedSeer Consulting Pvt. Ltd.
Emanation of a pro swadeshi policy is owed to constant demands for domestic protection by Indian startups such as Ola, Flipkart, Snapdeal against rival international giants such as Walmart, Amazon etc. Grant of such incentives to domestic companies makes it clear that the policy aims to put homegrown companies first and encourage them in standing their ground when it comes to them meeting international competition in the market.
Brushing aside criticism that the draft policy has attracted for being nationalistic in its agenda, Devangshu Dutta of consulting firm Third Eyesight, says that there is not a single democratically-elected government anywhere in the world that will make a statement that the interests of foreign business will be held above those of domestic businesses.
With international ventures eyeing a piece of the growing e-commerce sector, the draft policy has recommended for all future acquisition and mergers to compulsorily examined by the country’s anti-trust regulator, the Competition Commission of India. This isn’t all new as the country’s anti-trust regulator was already entrusted with this task. “For such entities, thresholds based on other variables (such as access to data) which are more relevant in this area, would be considered,” the 19-page draft policy added. This assumes significance in light of local traders and trader bodies opposing the Walmart-Flipkart deal worth $16 million for fear of traditional retail and kirana local shops being driven out of business. Opening a pandora’s box, the deal that was cleared by the CCI on 10 August raises uncertainty over its compliance with the new rules and if it will be able to withstand the changing landscape of the Indian e-commerce sector.
Devangshu Dutta of consulting firm Third Eyesight, however, believes that the draft ecommerce policy won’t have any impact on the Walmart-Flipkart deal, as it has been done and dusted, but the eventual ecommerce policy, as and when it is notified, will certainly have an impact on the future structure and strategy of their business. “In the past, the government has overlooked the bending of regulations in the matter of investments through “creative” corporate structures and discounting, but given the dominance of the two market leaders, it is unlikely that such instances would continue to be ignored”, Dutta adds.
“The deal has been cleared by the CCI which has maintained that concerns over predatory pricing can be brought to court expressly. Now that Walmart will have to share user data with Flipkart, the policy does not provide clarity on what laws and corporate practices will apply. Some conversation has certainly started but it won’t do much”, said Raman Jit Singh Cheema, a privacy lawyer and policy director at Access Now.
Although the CCI in its detailed order held that the deal was not likely to have an appreciable adverse effect on competition, it was met with protests from trader’s body, CAIT that has called for a bharat bandh on 28 September on grounds that the deal ‘violates Press Note 3 of 2016 and resorts to discriminatory treatment of traders’
The policy is one that stimulates the participation of MSMEs in the digital economy. It proposes their participation by establishing an e-commerce retail platform (in public-private partnership mode) exclusively for MSME vendors and suppliers. These platforms will be open to international vendors to purchase and sell locally produced goods. Aiming to push sales of Indian goods through small-town vendors, it talks about implementing pilot initiatives for MSME clusters from towns like Moradabad, Ludhiana, Aurangabad, and Meerut.
It proposes to aid financing of these clusters by facilitating collateral-free funding and incentivizing online platforms and aggregators to engage MSME vendors. This is a first of its kind mechanism to ensure that MSME’s that form an important
“I’m quite surprised by an underlying expectation, among analysts and industry alike, that the Government in India will lay down the red carpet for foreign investors at the expense of domestic interests”.
sale point in the country is formally introduced in the e-commerce sector. Providing impetus to MSME’s and its direct regularization through the policy also aligns with the ruling government’s end goal of ‘Digital India’. Another recommendation includes that the GST procedures for e-commerce be modified by allowing centralized registration instead of local registration. Currently, MSMEs with revenue of less than ` 20 lakh a year are not subject to GST if they sell offline whereas they are required to pay GST if they sell goods on online platforms.
For years traditional retailers have feared being wiped out on account of the onslaught of deep discounts that became synonymous with online shopping. They have voiced their concerns to the government which has ensured that the draft policy tilts in their favor. Apart from wanting to have a level playing field between foreign players and domestic startups in the country, the government’s decision may have been to hold on to the vote bank comprising of traditional vendors and kirana stores just ahead of the 2019 elections.
In what could potentially end price wars between online retailers, the draft policy imposes barriers to discounts through a sunset clause of two years which restricts differential pricing strategies (such as deep discounts) implemented by e-commerce platforms to attract consumers. The days of online discounts, therefore, stand numbered under the draft policy. If accepted, this could completely change the way online shopping works since until now discounts have served as an instant lure to attract customers, boosting sales for forums like Flipkart, Amazon, and others. “Bulk purchase of branded goods such as electronic products (especially mobile phones), white goods, branded fashion by related party sellers which lead to price distortions in a marketplace would be prohibited,” the draft stated. This is bound to impact a large number of sellers registered on websites such as Flipkart and Amazon that claim to have nearly two lakh sellers. Cloudtail, a joint venture between Amazon India unit and Infosys co-founder N.R. Narayana Murthy that makes up the bulk of sales on Amazon’s online platform will be particularly affected by this move, if implemented.
“Traditional trader bodies have been particularly happy with this move. Ever since online retail came into the picture, traditional retailers felt threatened. This is because they have not been able to match the low prices offered by online retailers due to which customers continue to flock online. If deep discounts are phased out, as proposed under the policy, it will be a huge boost to traditional retailers and one can hope to see them back in the retail game in a fair way and with big numbers”, an executive working in traditional retail said. According to Devangshu Dutta, concerns about deep-pocketed foreign companies acquiring market share in a predatory manner are neither new nor unique to India, nor to the retail sector. He says that countries where foreign retailers have faced opposition or regulatory barriers include markets as diverse as China and Thailand in Asia to Ghana in Africa.
“Given that the Indian e-commerce market is currently dominated by two large, capital-rich companies, Amazon and the Flipkart group, it is inevitable that other businesses, both large and small would express concern, and push for regulation that allows leveling of the playing field. Industry concerns are aggravated by the fact that growth of the e-commerce business in India has been funded by lavish amounts of equity being spent significantly in aggressive discounts and aggressive marketing”, Dutta said.
E-commerce firms, however, opine that restricting the discount option will prohibit companies from buying in bulk and hamper the boom in the Indian e-commerce sector. The policy has also attracted criticism for not being clear on the how the antidiscount policy will work. “Discounts can be in the form of seller discounts, platform discounts, bank/ wallet discounts etc. The policy does not provide a clear execution framework for phasing out discounts. We are also seeing a growth of online shoppers who shop online for convenience instead of discounts and will not be fazed by lesser discounts”, said Ujjwal Chaudhry, of RedSeer Consulting Pvt Ltd.
With marketplaces not being able to offer deep discounts through their listed vendors and the distinction between online and offline thinning off, online players will have to tap into strategies apart from offering discounts to retain customers.
The government is looking at establishing a national regulator for the e-commerce sector. This body will monitor all the issues in this department. The body called the Central Consumer Protection Authority (CCPA) will be tasked with dealing with consumer complaints and ensuring compliance with foreign investment caps in e-commerce. To act as a nodal agency for intra-government coordination, it will provide a platform for e-commerce operators for complaints regardingfraudulent activities and ensure mandatory registration of all e-commerce operators – domestic or foreign. It also seeks to put in place a dedicated helpline devoted to resolving customers complaints.
The Indian government that’s been facing pressure to build consensus on the WTO negotiations on trade-related aspects of electronic commerce is set to face flak for its draft e-commerce policy for its preferential treatment to domestic players. The draft policy has attracted criticism from government departments and ministers but the commerce department has maintained a tough stance on its “India first” initiatives saying that it needed to safeguard national interests.
The task force that prepared the draft policy said that the proposed obligations at a global level in respect of e-commerce appeared to be onerous, and attempts were being made through negotiations on regional trade agreements and multilateral discussions to make the commitments more comprehensive and stringent. It believed that if these attempts were to succeed, governments, particularly in developing countries, would be left with little flexibility to take measures for nurturing the domestic digital economy. Justifying the need for a domestically focused draft policy, the government said that it was to preserve flexibility and create a level playing field to enable formulation and implementation of appropriate policies in the future for encouraging domestic innovation and boosting the domestic digital economy to find its rightful place with dominant and potentially noncompetitive global players
The draft e-commerce policy holds that in the context of international trade negotiations, policy space for granting preferential treatment to digital products created within India would be retained. Recently, India and South Africa had asked WTO to explain why customs duty should not be levied on electronic transmissions. In a submission, the two countries proposed that “electronic transmission” under ecommerce be clearly defined as the present moratorium on customs duties on electronic transmissions could put developing nations at a loss as they have higher tariffs on physical products and zero duty on the same products in digital form. Developing countries, including India, fear that that products now delivered through offline mode would soon be digitized and easily transferred electronically, wiping out duties on physical products resulting in a revenue loss.
The draft policy makes it evident that India is going to ensure protection to its domestic players even if that means attracting criticism from other countries at the WTO negotiation and work towards being compliant with the Regional Comprehensive Economic Partnership Agreement. Going forward, the commerce department will put out a fresh draft to reignite the debate over the future of ecommerce but for now, the draft policy has signaled its intent to “put India first” on the global e-commerce stage and not get taken advantage of by developed countries.
In line with its agenda of building an ecosystem that prioritizes domestic players over foreign entrants, the government in its draft e-commerce policy recommends making RuPay, a homegrown card payment gateway created by the National Payments Corporation of India mandatory as one of the payment options for e-commerce transactions. By doing so, the government aims to increase the visibility of RuPay in the market against other payment options such as Visa, Mastercard.
Another swadeshi agenda is the requirement for foreign e-commerce sites to follow Indian’s two-factor authentication norms and payment procedures when processing payments by Indian cards. On the face of it, this comes across as a step that will create a level playing field but it leaves questions owing to jurisdictional issues unanswered. Among those left disadvantaged will be small e-commerce portals and payment gateway companies as they will find it difficult to stack up to complying with such tailor-made requirements.
The pro-nation draft e-commerce policy that intended to boost domestic start-ups was met with criticism from several ministries, government departments, and businesses. It has now landed in the Prime Minister’s office. In particular, the ministries had issues with data localization, setting up of a national e-commerce regulator, allowing 49% FRI in inventorybased online retail, restrictions on deep discounts, and payment through Ru-Pay. The 19-page draft that appeared more like a discussion paper than a finalized ecommerce policy showed glaring gaps and is set for a review, based on feedback from the different government departments and stakeholders. One of the challenges ahead is for synchronization of interests of multiple agencies responsible for its implementation. With concerns raised over the proposal, the government has set up a group of secretaries to look into the issues. Commerce and Industry Minister, Suresh Prabhu also tweeted that a fresh round of consultation was held with stakeholders to address concerns against it.
Raman Jit Cheema, a privacy activist and founder at xxx agrees that the draft requires reconsideration as certain aspects are very controversial. According to him, the policy requires clear and open discussion; otherwise, it comes across as a lobbying battle between e-commerce companies, tech companies, and venture capital firms. “The policy has been spearheaded by the government and its several wings and there has been a very little conversation about what is most effective for the user. The current draft relies on a local firm versus global firm battle which is not good. It’s pitching one set of financial interest over another. It needs to be relooked into through the prism of what is best for the Indian user”, Cheema said.
While the draft is set for changes, it still points in the direction of government’s thinking. Prior to having finalized the policy, the government through the draft policy has expressed its strategic intent and given a clear sense of the domestic agenda for the e-commerce framework that will be.
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