Four decades back, India opened its economy to foreign direct investment, changing decades of severe limitations. Ecommerce platforms were among the key beneficiaries. The authorities allowed 100 percent FDI under the ecommerce market model but illegal FDI in inventory-based ecommerce. That meant that ecommerce companies like Amazon could offer a marketplace for third party vendors to sell their goods, but they couldn’t hold and promote their own products.
Effective February 1, 2019, the government is enacting limitations that will challenge the whole business model of Amazon and Flipkart — Walmart purchased 77 percent of Flipkart in 2018. When the new rules become effective, the stock of a vendor will be considered under the control of an ecommerce market if more than 25 percent of its earnings come from that market. Therefore, these sellers might need to find other outlets for merchandise sales by February 1 so that no market is responsible for at least a quarter of the sales.
Currently, sellers like RetailNet, SuperComNet, and OmniTech Retail sell only on Flipkart. Two other businesses — Cloudtail and Appario — market only on Amazon India. Both are joint ventures between Amazon and, respectively, India’s Catamaran Ventures and the Patni Group. (Amazon has an equity investment in both Cloudtail and Appario.)
Amazon derives around 40 percent of its Indian sales from Cloudtail. Flipkart also has exclusive partnerships with high smartphone brands like Xiaomi and Oppo. Smartphones comprise more than half of ecommerce sales in India.
Additional Provisions of the rules are:
- Marketplaces cannot directly or indirectly give discounts on merchandise.
- Entities where there is equity participation by the market can’t sell their goods on this market’s platform,
- The market can’t need any merchant to sell any item solely on its platform,
- Marketplaces will need to submit a compliance report to the Reserve Bank of India from September 30 each year.
Amazon and Walmart allegedly asked for a six-month delay in the effective date of the new regulations. Both were denied. The Department of Industrial Policy and Promotion, which is responsible for defining FDI policy, characterizes the changes as a clarification rather than a significant change.
With their third party partnerships, Amazon and Walmart control nearly 80 percent of ecommerce in India. The government says the changes will encourage fair trade and curb the influence of foreign companies in establishing domestic prices. 1 beneficiary will probably be Snapdeal, an Indian ecommerce market that was established in 2010 but has been overshadowed by Amazon and Flipkart. Its site touts over 300,000 vendors with 35 million products. It has long complained about the absence of a level playing field.
Indian Ecommerce Market
India continues to be overshadowed by China in ecommerce growth since a quarter of its 1.3 billion people is illiterate and no more than 28 percent has net access. Unlike China, India has lagged in developing a middle class. However, with the increase of smartphone penetration and a rise in the income of city dwellers, the ecommerce picture has brightened. A September 2018 report by PricewaterhouseCoopers estimates that online trade in India will grow 25 percent annually for the next five decades, hitting $100 billion in 2022.
In 2016, Prime Minister Narendra Modi spearheaded an initiative to reduce restrictions on FDI. His political party has since suffered losses in recent state assembly elections, and political analysts speculate that Modi is attempting to get the support of the countless little local Indian ecommerce traders and retail merchants before a general election that must be held by May of the year. Local merchants find it difficult to compete with the discounted prices offered by Amazon and Flipkart and are currently subject to some new goods and services tax.
Effect of New Rules
The change in regulations will likely have a chilling effect on new FDI inflow in different sectors. Foreign investors may be wary of putting money into a country where regulations can change radically with very little notice.
Indian customers will suffer. They enthusiastically embraced both big marketplaces with their wide range of products, deeply discounted prices, and cash-back opportunities. People who came to rely on Amazon and Flipkart may balk at the higher prices on other ecommerce websites.
New neighborhood platforms may emerge. Mukesh Ambani, chairman of Reliance Industries, the nation’s largest industrial firm, announced that his company might roll out a new internet shopping platform for 1.2 million merchants in the state of Gujarat. It’ll be operated by a subsidiary, Reliance Retail, the biggest retailer in the nation by revenue. It manages 10,000 physical shops in over 6,500 Indian cities and towns. Ambani, India’s wealthiest individual, is thought to have helped shape the new ecommerce rules.
Some observers speculate that the strict rules will be weakened if Modi’s Bharatiya Janata Party does well in the upcoming elections.