Govt looks to cheer SMEs with tweaks to e-commerce norms

In a bid to bury the ghosts of demonetisation and rollout of the goods and services tax (GST), both of which impacted small and medium enterprises (SMEs), the Narendra Modi-led NDA government is trying to woo back its core vote base with a promise to tweak foreign direct investment (FDI) norms in e-commerce in India, one of the fastest growing online retail markets in the world which is about $41 billion in size.

The government’s revised norms for FDI in the e-commerce sector, which was announced earlier this week by the Department of Industrial Policy and Promotion (DIPP), could make things difficult for foreign-owned online players such as Amazon India and Flipkart, which is now owned by the $125-billion U.S. retailer Walmart.

On December 26, the DIPP banned e-commerce companies from selling products from entities in which they have an equity stake, and restricted online marketplaces [such as Amazon India, Flipkart and others] from mandating any seller to sell any product exclusively on its platform. It also mandated that a single seller cannot have more than 25% of sales on one online marketplace. It also instructed that cash-back policies provided by online retailers to customers should be “fair and non-discriminatory”. The revised norms will be effective from February 1, 2019.

Today the online marketplace in India is dominated by Flipkart and Amazon. Experts say the revised FDI norms might impact Amazon the most due to its investment in Cloudtail and Appario, which contribute a major chunk of its sales. Cloudtail is a joint venture between Amazon and Catamaran Ventures, a fund founded by N.R. Narayana Murthy; Appario is a joint venture between the Patni Group and Amazon. The government’s move to ban selling of products exclusively on a single marketplace would be a major blow to both Flipkart and Amazon as the online retailers have exclusive partnerships with smartphone makers—Flipkart with Xiaomi and Oppo, and Amazon with OnePlus. According to reports smartphones contribute about 50% of overall e-commerce sales in India.

Devangshu Dutta, chief executive of retail consultancy Third Eyesight, feels the revision in norms is in light of the upcoming general election. “Given that we are entering an election year, clearly, the government needed to be seen supporting the domestic constituents.”

Adds Amarjeet Singh, partner, KPMG India, “The changes are being made to appease the domestic retail lobby. The domestic players who may have been hurt by the ecommerce revolution need to make themselves more nimble than to rely on government’s interventions of this nature.”

K. Ganesh, Bengaluru-based entrepreneur and promoter of e-commerce companies such as BigBasket, Bluestone, FreshMenu, and Homelane, feels some of changes to the FDI policy in e-commerce go against the principles of free market economics. “This will negatively impact all the milestones achieved in the last 10 years during which billions of dollars of FDI has come in, millions of small sellers have had the opportunity to sell their products across India thanks to well-funded marketplaces, lakhs of new job were created at entry level. I feel there is scope of some of these measures to be clarified in the larger interest so the gains of the past are not eroded,” says Ganesh.

In May this year the world’s largest retailer Walmart bought India’s largest e-commerce company, Flipkart, for a whopping $16 billion. It was the world’s biggest e-commerce deal and gave the U.S. giant access to one of the biggest markets in the world.

Commenting on the development, Flipkart released a statement that read: “It is important that a broad market-driven framework through right consultative process be put in place in order to drive the industry forward.” India’s e-commerce poster child is of the opinion that the e-commerce ecosystem created innovations in MSME manufacturing, supply chain, warehousing, packaging and digital payments, having created thousands of new jobs. “This is just a start, the industry is set to be a major growth driver for the Indian economy and create millions of [more] jobs in the future,” the statement read, adding that “it is important that a broad market-driven framework through right consultative process be put in place in order to drive the industry forward.”

Kunal Bahl, CEO and co-founder, Snapdeal, however, spoke in favour of the changes introduced by the government in FDI norms. “Snapdeal welcomes updates to FDI policy on e-commerce. Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce,” Bahl posted on Twitter.

Even smaller niche online marketplace players Qtrove welcome the new policy changes. Vinamra Pandya, founder and CEO, Qtrove, an online marketplace for curated organic food, personal care, and home décor products, believes in fostering small and medium enterprises on its platforms and let them sell their products without the pressure of predatory pricing, unrealistic discounts and cash backs. “We are not into electronics and fashion where this predatory pricing and discounts rule the roost. We welcome this decision, the only rider being we would need to see that it is a balanced ruling.”