The Union government notification that ostensibly aims to liberalise e-commerce in India has had a strange effect. By all accounts, it has stunned dominant players, such as Flipkart and Amazon, into silence, sending them back to the drawing board, presumably to understand the extent of the damage. A regulation which, at first sight, makes it easy for foreigners to invest in Indian e-commerce, may even have ended up reassuring the competition, the brick and mortar retailers. This is because far from attracting FDI in the sector, the new rules contain riders likely to deter the existing players and also the new ones. The new regime will increase bureaucratic discretion, which will force firms to become more creative in bypassing regulations and open the door to rent-seeking.
To begin with, the policy makes a distinction between inventory-based e-commerce (where no FDI is allowed) and marketplace-based e-commerce (where 100 per cent FDI has been allowed). This is an artificial distinction driven by a flawed notion — of bringing about parity between rules governing physical retail and e-retail. Instead of simplifying the complex labyrinth governing physical retail, the government has chosen to further complicate e-retail. Second, the new rules place an upper limit of 25 per cent as the maximum sales that an e-commerce entity can source from any one of its vendors. But why should the government decide how products are sourced? And why 25 per cent? This provision is likely to trigger a cat-and-mouse game where firms create newer entities to avoid being caught. But perhaps nothing is as befuddling as the rule that states e-retailers “will not directly or indirectly influence the sale price of goods and services and maintain a level playing field”. Pricing freedom is central to the functioning of a market. There are also practical difficulties in enforcing this. For instance, how does one gauge the price of a smartphone that has just been superseded by a newer version? Are retailers expected to run to bureaucrats in the department of industrial policy and promotion on a daily basis, or will a government committee work out a formula?
The e-commerce market has seen exponential growth and is expected to touch $69 billion by 2020. It is an industry that has the potential to create jobs and spur economic growth. But a ham-handed policy framework is not the way forward. The Narendra Modi government, which makes claims on improving the ease of doing business, should dissolve the distinction between physical- and e-retail and simplify norms that allow businesses to flourish, creating jobs as well as providing a richer array of goods and services to consumers at the lowest price.