The draft e-commerce policy and what it means for e-tailers

The final draft of a new national e-commerce policy is still in the making, but there is a preliminary draft that is out for comments from select stakeholders.

Aug 05, 2018 12:08 IST India Infoline News Service

The final draft of a new national e-commerce policy is still in the making, but there is a preliminary draft that is out for comments from select stakeholders. The draft e-commerce policy is essentially based on three principals:
  1. Forcing a more rational business model on e-commerce rather than just using capital to fund discounts for customers
  2. Providing a proper structure to the industry through more transparent rules that are regulated by a centralized body to vet requisite approvals
  3. Protecting the sanctity of domestic customer data through a mix of stringent rules and by incentivizing local data maintenance infrastructure

While there are finer aspects to the draft, these are the three broad pillars on which it is currently based.

Why the urgency for an e-commerce policy?

There are perhaps three reasons why this e-commerce policy is being pushed through on a top priority.

Firstly, Amazon’s decision to invest $5bn in India may be small change for the Jeff Bezos-led company which has a market capitalization that is closing in on $1tn; but for the Indian market, it could become a game-changer.

Secondly, global retail giant Walmart’s recent acquisition of a 77% stake in Flipkart is the first indication that domestic players will find it hard to stand up to deep pockets.

Last, but not the least, there is a very strong brick-and-mortar lobby that is bearing the brunt of this rapid growth in e-commerce. With less than a year to go for the general elections in 2019, the government would be wanting to keep this lobby happy.

Current breakup of India’s e-commerce marketplace

(Data Source: AT Kearney)

India’s e-commerce marketplace is still largely concentrated on electronics and apparel. If you open any of the ‘n’ number of e-commerce websites and compare the prices of a laptop or an LCD TV with the price in the showroom, you’ll notice that the difference is not only significant but also salivating. These price differences are more pronounced during events such as flash sales, end of season sales (EOSS,) Diwali sales, Christmas sales, and weekend sales.

What is the gist of the e-commerce policy and what does it mean?

Of course, we will have to wait for the final draft before we do a complete analysis, but the contours of this move are definitely visible.
  • A centralized and independent regulator will be set up for supervising and overseeing e-commerce in India. This will be along the lines of what has been done for insurance, pensions, capital markets, and telecom in the past. The regulator will eventually take care of most routine approvals, investigations, addressing customer complaints, deciding on FDI caps, etc.
  • It is estimated that the digital economy in India will be worth $1tn by the year 2022, and hence, regulation becomes critical. The draft e-commerce bill proposes that e-commerce players should phase out all their discounts over the next two years. This is more so in cases where the discounts result in trade practices that distort fair competition.
    This could have two implications. Firstly, it will give a level playing field to brick-and-mortar players who also have to invest in physical infrastructure. E-commerce is the way the world is moving and India’s focus should be more of adaptation than resistance.
    Secondly, the government has a point on the method of operation of e-commerce platforms. For example, the likes of Flipkart and Myntra use the capital raised at steep valuations to actually fund their discounts. When these discounts are charged as expenses in the income statement, it is virtually tantamount to using capital inflows for revenue expenses. That is bad accounting and imprudent business practice. To that extent, it needs to be regulated.
  • There will also be a likely change in the FDI policy. Currently, 100% FDI is permitted in online e-commerce stores that follow the marketplace model. This facility is not available to specific brands. In addition, 49% FDI in inventory-based B2C models is also allowed as long as the platform is purely intended to push India-centric products. Of course, the founder and owner of such a company will also have to be a resident Indian. One will have to see what happens to companies like Amazon India which also holds stakes in select partners and how the Chinese walls will be drawn.
  • The biggest clause, perhaps, is on the data security front. The focus will be on data localization and data privacy. That means; all customer data of India-centric customers will have to be maintained locally only. Whether they will permit redundancies and back-ups in other countries remains to be seen. To encourage the localization of data, the policy proposes to accord “Infrastructure Status” to local data centers and provide special tax sops for data localization.

In a nutshell, moves like the creation of a central regulator and curbing anti-competitive activities are in sync with best business practices. On data localization, it is not clear how a borderless asset like data can be regulated and how such curbs will be implemented in practice.

The eventual phasing out of discounts remains a double-edged sword for e-commerce. It may sound unfair to business and to customers but it is not just about the interests of brick-and-mortar players. It is actually about slippery accounting where the dividing line between capital and revenue is getting blurred. That is something the policy really needs to address!

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