Relevance: mains: G.S paper III: Indian Economy
Context
- Tighter rules governing e-commerce platforms notified by the government this week are designed to level the playing field for all vendors in an online marketplace.
- These impose restrictions on related-party transactions, preferential treatment to suppliers, and inventory dumping.
Background of the announcement
- The government had announced the foreign direct investment (FDI) policy for the sector in 2016, during which US retail giants Amazon and Walmart came to occupy a commanding position in India’s $41-billion e-commerce industry.
- Indian brick-and-mortar retailers have grown restive, claiming online marketplaces like Amazon and Flipkart have acquired the power to influence retail prices, in contravention of the policy that restricts FDI in business-to-consumer (B2C) e-commerce, but not in business-to-business (B2B).
- The government appears to have bought this argument and the new set of rules are meant to give effect to the original e-commerce policy even as inter-ministerial consultations are on for drawing up a new one.
Battle for online marketplace
- India is a crucial battleground for Amazon and Walmart they have committed a combined $21 billion to this market and they may now have to review their business operations in the country.
- Amazon has several joint ventures, including Cloudtail and Appario, that may be affected by the restrictions on sales by related parties.
- Flipkart has exclusive partnerships with smartphone brands like Xiaomi and Oppo that could, in turn, face a ban on exclusive deals for products.
- Both offer promotional schemes such as cashbacks and faster delivery, which are now deemed discriminatory.
- The companies will now have to furnish reports to the Reserve Bank of India annually, adding another dimension to compliance and monitoring of the e-commerce industry.
- Flipkart and Amazon can thus be reasonably expected to push back against rules they find too constrictive, given the size of their investments in the ecosystem that fuels e-commerce on this scale.
Way forward
- The government, on its part, is clear that the new rules are needed to prevent anti-competitive behaviour in the e-commerce industry.
- An online marketplaces should not have any role in determining the prices of the products sold on their platforms.
- As regulator, it cannot avert its gaze from market distortions, even if the latest rules do not fit snugly into the country’s competition law, which proscribes only a select segment of exclusive arrangements that have a demonstrably significant effect on market freedom.
- The focus should be on establishing specific arrangements that create barriers to new entrants.
- The extra load on auditors is, however, a small price to pay in the larger interest of transforming India’s retail sector into
a modern industry. - E-commerce provides India’s army of medium and small enterprises one of their least-cost options to sell their wares, and the government’s approach of encouraging online marketplaces with due safeguards cannot be faulted.
- But the regulatory reflex must be tempered by the realization that a ramshackle retail sector is not in the interests of consumers or producers.