Online shopping has been a boon for the overworked millennial, who neither has the time nor energy to visit malls and stores. However, the Department of Industrial Policy and Promotion (DIPP), headed by the Ministry of Commerce and Industry, has made an important change to the way India’s e-commerce platforms function.
This policy, unveiled in the form of a press note late December 2018, came into effect today, February 1. It states an e-commerce platform can neither sell goods and services sourced from companies it controls, nor influence prices of anything sold on it.
Let’s unpack the jargon
Before we understand what the new policy means, we need to understand some basic terminology. As defined by the commerce ministry, e-commerce is “buying and selling of goods and services including digital products over digital & electronic network [sic]”. However, there are two types of business models when it comes to e-commerce — inventory and marketplace.
A marketplace model means that an entity like Amazon or Flipkart can provide a technological platform for the buying and selling of goods, and can act as a “facilitator” between a vendor and consumer. An e-commerce platform operating on a marketplace model needs to have IT infrastructure, like computers and internet, and may provide logistical support, like warehousing and payment collection, to the vendors it hosts.
On the other hand, an inventory model is one where the e-commerce company owns the inventory it is selling directly to consumers. So, if Amazon fully or partly owns company X, the latter won’t be able to sell its products on Amazon anymore.
Understanding the new policy
Under the new policy, a company with a marketplace model can’t exercise ownership or control over any inventory bought and sold. If the larger e-commerce platform controls 25% of an online vendor’s inventory or some equity in the vendor’s company, that vendor’s inventory will be deemed controlled by the e-commerce platform, preventing the vendor from selling their products on that site.
Another huge change is that e-commerce companies cannot influence the sale price of any goods or services. The policy adds that 100% Foreign Direct Investment (FDI) is possible only in the marketplace model.
An official from DIPP told Livemint, “Marketplace should be a pure marketplace. We hope these steps will establish a pure marketplace, and influencing price will be more difficult.”
What’s different now?
Reuters reports that Amazon India has been forced to discontinue its grocery service and remove all sorts of products, such as sunglasses and household cleaning fluids. Reason: a huge number of Amazon products are sold by Cloudtail and Appario, vendor companies Amazon has an equity stake in. The e-commerce platform’s affiliates run Amazon Pantry, too. Flipkart, now acquired by Walmart, has been similarly impacted. Like Amazon’s Cloudtail, WS Retail can’t sell products on Flipkart anymore.
Another problem is sales and discounts: Because the new policy dictates that e-commerce platforms can’t influence the cost of goods and services, any exclusive deals between Amazon and Flipkart and other companies stand suspended at the moment. This means the future of exclusive deals, sales, and discounts with smartphone, appliance, and other technology brands is uncertain.
Amazon India and Flipkart have asked for an extension to implement the policy, so that they can understand its implications. In a statement to Quartz, Amazon India said, “With over 400,000 sellers and hundreds of thousands of transactions happening daily on the Amazon India Marketplace, we need adequate time to understand the details of the policy.”
Traders against extension to e-commerce sites
However, the Confederation of All India Traders (CAIT), an advocate for small traders and businesses, has threatened a nationwide campaign against an extension. It has demanded that DIPP resist any stalling tactics by these major e-commerce retailers. CAIT Secretary General Praveen Khandelwal said, “Any extension/deferment/amendment or change in FDI policy in e-commerce at this stage will be conceived as a weakness on part of the government, which will also have a political fallout.”
Amazon and Flipkart had planned to expand their 30 brands that sell products in over 200 categories on their platforms. Now, both stand to lose 40% of their revenue — Rs 35,000 crore and Rs 40,000 crore, respectively — by 2020.
Impact on the average consumer
For now, Indian shoppers are choice-strapped. They will have to do without goods and services from Amazon’s Echo and Kindle, and groceries in Amazon Pantry, to exclusive discounts on Xiaomi and Oppo on Flipkart. They will also not be able to avail any discounts or deals.
“As e-commerce marketplaces strive to comply with the new rules, consumers will bear the brunt of these changes. Prices will rise, discounts will evaporate, and product options and availability will shrink,” said Lloyd Mathias in the Economic Times. He added that the problems CAIT notes — brand exclusivity, predatory pricing, and deep discounting — are all “consumer boons”.
Mayur Saraswar, head of IT and telecom at payroll firm Teamlease Services, tells Quartz, “Companies won’t be able to adhere to the new norms and will have to choose between incurring losses and being non-compliant… This will also disrupt job creation, slowing its pace.”
On FDI, technology lawyer at Nishith Desai Associates, Kartik Maheshwari says investments are contingent upon the stability of government policy. But the government’s “sudden change in policy is likely to throw a spanner into the expansion plans of all foreign platforms”. Moreover, Maheshwari adds, the lack of public consultation on the matter is an issue.
This move by the government is protectionist of domestic businesses and seems to keep in mind interests of small traders. But it does have consequences on consumers’ choice and purchasing power, FDI inflow, and growing businesses’ ability to partner with e-commerce platforms.
Rhea Arora is a Staff Writer at Qrius
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