Decoding the retail FDI tweaks

The tweaks announced on Wednesday in the government’s policy on foreign direct investment in e-commerce have been described as a Boxing Day sucker punch for the likes of Amazon and Flipkart. The moot point is whether the changes in rules will force the e-commerce giants to press the reset button. After all, the last round of changes in rules — via Press Note No 3, issued on March 29, 2016 — was widely expected to restrain massive price discounting. Instead, smart lawyers earned hefty fees by putting in place new legal structures designed to circumvent the rules. This time too lawyers (and lobbyists) could undoubtedly have a field day in helping navigate the complex rules.

Let’s survey the big changes. An e-commerce marketplace cannot sell products from group companies where it has an equity stake. So, for instance, Catamaran, which has a partnership with Amazon, will now be prohibited from selling products on the Amazon marketplace. Under the new rules, Amazon and Flipkart cannot rely on a bunch of selling companies where it holds a stake, to manage an inventory-based model under the garb of a marketplace model. Amazon and Flipkart will argue that a pure marketplace model makes it tough to maintain service levels and improve the user experience. And that’s why the new rule has set the cat among the pigeons. In private, both Flipkart and Amazon claim that they weren’t consulted about the changes. And that any such attempt to introduce changes does nothing to offer a stable policy regime for FDI in e-commerce.

What that does to Amazon and Walmart’s appetite to commit FDI is anybody’s guess. Walmart’s investment in Flipkart was meant to offer an opportunity for the retail giant to use its huge global supply chain to list its products on Flipkart. Under the current rules, that option looks closed, at least on the face of it. Now that it has sunk in more than $17 billion in Flipkart, there’s a possibility that it will mount a massive lobbying effort in the capital. Amazon, too, has made investments in More, Shopper’s Stop and is in discussions with Future Group to buy a minority stake. The fate of each of those deals is now in question.

It is obvious that the latest changes in rules are designed to assuage the small trader lobby, ahead of the elections. Some of the smaller sellers who are part of the e-commerce marketplace say that Amazon and Flipkart prefer to consolidate their business with a few large sellers. And they have been systematically edged out with a system of discounts, exclusive offers and cashbacks. And in the world of physical retail, e-commerce is starting to drive a wedge into the fortunes of smaller retailers, even in the smaller towns. 

Clearly, the government hasn’t learnt much from its previous trysts with framing onerous rules, which are tough to enforce. In an election year, however, it is invariably tempting to come up with more regulation, not less, instead of allowing free markets to take their course. 

This time though, the burden of enforcement has been conveniently shifted to statutory auditors, who will need to certify that the companies have carried out the changes in norms. 

The timing is a bit strange. Especially, given the fact that Indian e-commerce is on the cusp of cutting out needless waste and reducing losses. The era of venture capital-funded losses has already come to an end. Strategic investors don’t have the same appetite for gross merchandise value (GMV)-fuelled sales and mounting losses. And post its takeover, it is a matter of time before Walmart starts to streamline Flipkart’s operations and push for greater efficiency. That would mean Amazon, too, would gradually allow greater sanity to prevail. The free market would have taken a bit more time — but there’s every chance that it would deliver more sustainable changes, rather than centrally mandated changes in policy.

Think about it. One of the other offshoots of this new set of FDI norms rules is that there will be no such curbs placed on a domestic player like Reliance, the Tatas or Future Group. Future Group is already in talks with Amazon. The new policy measures should, therefore, give local, cash-rich conglomerates like Reliance or even the Tatas, a free rein to grow without any impediments that foreign players like Amazon and Walmart will have to face. The notion of a level playing field has been abandoned. And that will make many Indian admirers of the Chinese model — with its bias towards local companies — quite happy.

The optics are interesting. The government wants to save the livelihoods of a large community of small traders and retailers. Equally, a far larger section of consumers has benefitted from the deep discounts that e-commerce has offered. And the other real beneficiary of these policy changes could be large, established firms like Reliance, or even the Tatas, who now get an opportunity to build a strong presence in blended retail, even as foreign companies remain mired in bureaucratic red tape.

The writer is co-founder, Founding Fuel