Government tightens e-commerce norms, set to benefit local businesses

The Ministry of Commerce and Industry has barred e-commerce players such as Amazon and Flipkart from selling the products of their own subsidiaries. The e-commerce industry is around 18 billion dollar and expected to grow fourfold by 2022. But with the advent of new regulations, growth is expected to slow down a bit in the particular segment. The main beneficiary of the new rules will be medium and small-scale industries (SMEs) and retailers. The retail industry employs a larger population of the country but it is rapidly losing its market share due to the unfair practices of e-commerce players. Since long, the retailer associations were protesting against unfair practices of the larger businesses like Amazon and Flipkart. These businesses have swiftly captured the market and driven the brick and mortar store retailers out of business. For an instance, Amazon has joint ventures with many retailers including Cloudtail which is owned by N.R. Narayana Murthy.  

In March 2016, the government allowed 100 percent FDI in online stores that follow the marketplace model; no FDI is permitted in firms following the inventory model. Marketplace model means providing an information technology platform by an electronic commerce entity on a digital and an electronic network to act as a facilitator between buyers and sellers. Primarily, companies like Flipkart, Snapdeal, Amazon keep following this model.

An inventory model means an e-commerce activity where the inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly. Alibaba, the electronic commerce giant of China follows this model. “There is wrongful subsidization of the products by electronic commerce players. In the marketplace model, the e-commerce entity should be neutral to all vendors,” mentioned an official.

The discounts are given by an online retailer on their platform is explicitly banned. Competition Commission of India (CCI) found that Flipkart and other online retailers were providing discounts and promotional benefits on their platform. Some e-commerce companies offer more than a 70 percent discount on various products on special occasions. These companies say that these discounts are offered by the third party. But CCI thinks otherwise. The Confederation of All India Traders complained that most of the electronic commerce companies offer preferential treatment to some retailers like the customers of Flipkart in B2B (business-to-business) segment. So till now, the e-commerce market was skewed against the small retailers. But to protect small players’ interest and a fair chance to compete with e-commerce giants, the ban on discounts and exclusive deals is imposed.

There is also a provision about establishing a regulatory authority which will also take care of compliance with FDI caps in e-commerce in the country. A comprehensive law and a regulator were very much required because of the burgeoning the e-commerce market and need to be regulated otherwise the large fish will simply eat the smaller one. The e-commerce companies will have to store all the data in India and for this, they will be given two years’ time. 

On the consumer front, electronic commerce companies will lose their consumers due to the ban on discounts and exclusive deals. The growth of e-commerce firms will slow down due to the bar on the exclusive partnership from smartphone brands which contribute more than 50 percent of the total e-commerce sales in the country.

The new regulations will be effective from February 1 and are expected to reap the electoral benefits for BJP in General Election 2019. The small and medium traders are the main voter base of BJP and they were hurt the most due to the unfair practices of e-commerce companies. They were also not happy with the fact that the Modi government was not doing anything for the same. Now they will once again ardently support to Modi government and it has given a bonanza to the traders through new regulations.