Modi govt cuts e-commerce price advantage to save retail

The press note titled Guidelines for Foreign Direct Investment (FDI) on e-commerce made a policy-level attempt to rein in the Indian e-commerce business by creating a ‘level-playing field’ in the overall Indian retail market

At first sight, it seemed like a simple three-page document that arrived by post. A closer look, however, showed how it was capable of having a far-reaching effect on the country’s retail sector and e-commerce marketplace.

The government has done away with the price advantage that e-commerce companies enjoy over their retail counterparts.(File photo)

The press note titled Guidelines for Foreign Direct Investment (FDI) on e-commerce, issued by the Department of Industrial Policy and Promotion on Tuesday evening, made a policy-level attempt to rein in the Indian e-commerce business by creating a ‘level-playing field’ in the overall Indian retail market.

The stated intention of the note was to clarify that the government allows 100% FDI in business-to-business e-commerce companies but not in business-to-consumer ones. This also means that the said automatic approval applies only to companies that do not hold any stock, but act as a marketplace where vendors can sell their products and services. Therefore, 100% FDI is not allowed either in Flipkart, Amazon and Snapdeal — the three biggest players in this space — or others like Myntra, Jabong or online grocers like Bigbasket.

Experts, however, believe that there is more to the document than what meets the eye.

Sreedhar Prasad, who heads the e-commerce business for consulting firm KPMG, said, “Much of the note was already known. But then my eye fell on its last but one point — which was very significant.”

Under the subhead ‘Other conditions’ in the press note was a line that stated: “E-commerce entities that provide a marketplace will not directly or indirectly influence the sale price of goods or services, and shall maintain a level playing field.”

With an eye on increasing sales (also called gross merchandise value), e-commerce companies are known to offer heavy discounts on items sold on their websites. In most cases, these discounts are offered by compensating the vendors for additional price cuts.

Read: Online marketplaces can get up to 100% foreign investment

With this point, the government has done away with the price advantage that e-commerce companies enjoy over their retail counterparts.

“This move will help investments in this sector in the long term, where consumer experience and fulfillment – not deep discounts – will hold the key. Therefore, the government’s intention is to create a level playing field,” said Prasad.

The deep discounts that consumers have come to enjoy on e-commerce marketplaces are, in reality, funded by capital infusion from investors. Flipkart, for example, lost around Rs 2,000 crore on sales of Rs 10,400 crore in the year ending March 2015.

Prasad believes that reining in deep discounts (and therefore, losses) is one way to create a conducive investment climate in this space. “There is money, but waiting for more profitable models,” he said.

Read: 100% FDI allowed in B2B e-marketplace via automatic route

And of course, discouraging deep discounts helps offline retail businesses.

“This could force online players to change their model as predatory pricing will no longer exist,” Kishore Biyani of Future Group has said, according to a Times of India report.

However, some feel that the clampdown on deep discounts needs more clarity. Harminder Sahni, the founder and managing director of Wazir Advisors, wondered if this was a new ‘minimum price policy’. “We have been fighting MRP (maximum retail price) and now we have a minimum retail price too? How will this be done unless the government comes with a price monitoring system that betters Amazon,” he asked.

The other significant policy-level move was made by restricting sales from any one vendor to 25% of the overall sales. “An e-commerce entity will not permit more than 25% of the sales through its marketplace from one vendor or their group companies,” the stipulation read.

Flipkart’s WS Retail and Amazon’s Cloudtail contribute to a significant portion of the parent company’s sales. The new policy means these companies will have to either significantly cut down on operations undertaken through their respective subsidiaries, or give greater scope to other brands. “The government is telling e-commerce players that it understands how their business is done, but it also wants to look at the larger potential of attracting FDI in this space,” said Prasad.

While Flipkart and Amazon did not comment, a Snapdeal spokesperson said: “It is a comprehensive announcement that will pave the way for accelerated growth of the sector in India.”