E-Commerce: Are open digital markets the next big thing in India?

Unbundling e-commerce in India could upend billions of dollars of investment

By Andy Mukherjee

The man behind India’s globally acclaimed payments revolution — and before that, Aadhaar, the world’s biggest digital identity project — has found a new calling: democratizing burgers and biryani.
 

Restaurant-delivery platforms are already worried about Infosys Ltd. Chairman Nandan Nilekani’s newest foray into public-policy evangelism: Open Network Digital Commerce. But it isn’t just food or groceries. An unbundling of e-commerce in India could upend billions of dollars of investment. Walmart Inc. is tentatively supporting the government-backed initiative to see where it goes. Amazon.com Inc. has so far agreed to integrate its logistics services — from pickup to delivery — with ONDC.

If China led the quick-response, or QR, code revolution, India’s singular contribution to the world of money in the last seven years has been the Unified Payments Interface, a powerful idea that has made deposits scattered around different banks as easy to spend with a smartphone as cash. The model, which got copied around the globe, now has its biggest success in Brazil’s Pix platform, which has made cards all but redundant. There are plans to replicate India’s UPI at a global scale in money transfers across borders.

Meanwhile, Nilekani has shifted his gaze to e-commerce. Around 75% of Indians with internet access are not shopping online, while only 5 million out of the country’s 100 million micro, small and medium firms are registered to sell digitally. Only a fraction of them garner meaningful business on platforms. In a report with the consulting firm McKinsey & Co., ONDC, the non-profit that has emerged as a result of Nilekani’s advocacy and the government’s blessings, describes how it will expand this stunted landscape:

ONDC presents an alternative to the existing platform-centric model. Moving the diverse Indian bazaar of goods and services online democratizes digital commerce for buyers and sellers. Buyers can tap into it using any participating app to launch a search for an item. The network makes it possible for them to connect with thousands of sellers across the country who sell on ONDC via their preferred seller app. Within seconds, the customer sees a set of choices at a range of price points, along with transparent options for delivery modes, times, and costs provided by a choice of logistics operators.

The political bluster accompanying ONDC, however, is undermining the project’s economic promise. Commerce Minister Piyush Goyal says India will use the “full force of the government” to promote the open e-commerce network. The two American-owned market leaders, Walmart’s Flipkart marketplace and Amazon’s India shopping site, can expect the rhetoric to get louder as next year's general elections draw nearer. Those who don’t come on board now with their customer data will repent because, as TechCrunch quoted the minister as saying recently, at some stage “we will also have to cut off those who are left behind.”

The threats and warnings are adding an unnecessarily statist undertone to ONDC’s technocratic pitch. Although they're growing rapidly, online sales account for just 7% of all of India’s commerce, most of which passes through millions of mom-and-pop shops. India has a real problem of emerging duopolies in government-regulated sectors like telecom and transport. But for some reason, New Delhi is giving the impression that cheaper chicken tikka for the middleclass is a policy priority.

At least that’s where the project is at. In Bengaluru and New Delhi, thousands of online restaurant orders are bypassing Swiggy and Zomato, the two popular online food-delivery platforms. Customers are discovering McChicken meals for 190 rupees ($2.30) on a fintech app like Paytm when the same thing is selling on Zomato Ltd.’s site for 204 rupees. (Hat tip to Moneycontrol, which did the price comparisons recently.)  

Paytm is getting behavioral data by seeing more of its users’ shopping transactions; fulfilling those orders is not its headache. Walmart is a more reluctant campaigner. After all, the government’s open bazaar won’t stop at aggregating meal orders or auto-rickshaw rides. Participating too vigorously might mean cannibalizing Flipkart, its main retail business. That’s perhaps why Walmart's PhonePe payments unit has designed Pincode, a custom-built app for hyperlocal shopping. But Goyal has cottoned on to this, and threatened to exclude those e-commerce players that are not coming to the network with their main platforms.

I remain skeptical of ONDC, and not only because of its clunky moniker. (Good luck wooing millennials and Gen Z with that acronym.) The word-of-mouth popularity is largely due to a 50-rupees-per-transaction initial discount that the banks backing ONDC are funding. Take that away, drop the subsidies on delivery charges and eliminate the incentives to sellers, and this is where the dust will likely settle — restaurants will get a slightly better deal than now, forcing Swiggy and Zomato to lower their commissions and improve service. There will be no revolution.

Aadhaar, the unique number used to authenticate people’s identity digitally, took off because the state put its coercive power behind it. The payments innovation succeeded because money enjoys a universal sameness — demand deposits are immediately convertible into a predefined amount of sovereign-issued cash, no questions asked. When that assurance comes under a doubt, like during the recent US bank failures, authorities take extraordinary steps.

Everything other than money, however, is a little differentiated. Vegetables are fresher in one shop, cheaper in another. Affluent customers go for the largest possible shampoo bottle, while poor families buy small sachets because that’s all they can afford. Everyday staples have proved challenging, not only for pure e-commerce players but even for the Mumbai-based tycoon Mukesh Ambani’s massive network of mom-and-pop stores. It’s just very hard in a country of India’s size and diversity to have the supply chain so well-primed that the exact thing the consumer wants is available in the neighborhood shop. 

In theory, the idea of breaking up e-commerce looks nice. One set of apps can let buyers search for products, another can allow sellers to upload their inventory and enable logistics players to offer their services. As a participant in the ONDC experiment told me, the democratization Nilekani is seeking could end up playing the same role as the “Third Front” in Indian politics. The country’s two main political organizations, the ruling Bharatiya Janata Party and its main opposition, the Congress, can never rule out an alliance of regional groupings, however improbable. This acts as a check on the behavior of the political system. ONDC won’t replace Amazon and Walmart, but the consumer's bargaining position will be improved by the presence of a third actor. And unlike the zero-sum game of politics, there may be an opportunity here to expand the market. 

The larger businesses may exploit the potential first. Unilever Plc’s India unit or ITC Ltd., the tobacco giant that hawks everything from wheat flour and soap to paper and hotel rooms, could connect their brands with ONDC’s so-called seller apps. Their products already enjoy consumer trust. Becoming discoverable outside the top e-commerce platforms means adding a distribution channel. Over time, the benefits may trickle down. Some hyperlocal enterprises will gain customers, and some artisans’ popularity will expand beyond their immediate domains. But it won’t address the paucity of purchasing power at the bottom of the economic pyramid, the real constraint on e-commerce in India.

When you unbundle a service, you reintroduce all the wrinkles someone had made it their business to remove: Wrong shirt size, cold food, smelly rides, no returns, no refunds — and nobody to blame on Twitter except a nonprofit. Before religious festivals, algorithms at India’s popular e-commerce platforms are on high alert for spikes in orders of “decorative” swords. Those can be used to trigger riots, seriously denting the reputational capital of behemoths like Amazon and Walmart. Will ONDC be equipped to handle this bewildering gamut of complexity?

It’s fine for the government to promote ONDC, but it must ask how much coercion it wants to employ and to what end. If open, unfettered markets could do everything, why do we still have profit-making organizations? That question, asked by the Nobel Prize-winning economist Ronald Coase, in his 1937 paper, “The Nature of the Firm,” remains alive even with digitization slashing transaction costs. Out of the 11,000 ONDC orders on April 30, as many as 10,000 were touched in some way by Magicpin, an Indian startup, Moneycontrol has reported. It’s still early days, but there may be no escaping the winner-take-all phenomenon even with open markets. For all the hype around cheap meals, Nilekani’s democratization of commerce might turn out to be a nothingburger. 
Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper