India’s New Draft E-Commerce Policy

E-commerce companies are some of the most valuable startups in India at the moment. Companies like Flipkart, Myntra, Jabong, etc. have been able to get more funding at a higher valuation than startups in any other segment. Up until now, the e-commerce segment was virtually unregulated. Hence, the bigger companies were at an advantage because of their deep pockets. This created a trend of consolidation within the industry. American based global companies such as Wal-Mart and Amazon ended up becoming the major players in the e-commerce industry. Amazon has already invested more than $5 billion over the course of many years. Similarly, Wal-Mart has pumped in $16 billion with its acquisition of Flipkart.

However, in July 2018, the government has changed its stance. The Indian government has introduced a new e-commerce policy. This policy is highly intrusive and puts global companies at a disadvantage. The rules have been created to favor the Indian companies at the expense of global majors. This has prompted companies like Amazon and Wal-Mart to ask the United States government to intervene.

There is a likelihood that the purpose of this policy introduction was to show that trade tariffs on Indian products in the United States can also result in losses for American companies. Whether the government seriously intends to implement this policy or whether this is only a bargaining chip, needs to be seen.

In this article, we will have a closer look at some of the rules that have been formulated in this policy and also study their impact.

Deep Discounts: The e-commerce sector in India grew rapidly because of the deep discounts that are offered by these e-tailers. However, if the government’s draft policy does come into effect, deep discounts will be a thing of the past.

The government is introducing restrictions on online companies to ensure that the predatory pricing is not followed. At the present moment, foreign-based companies like Amazon and Flipkart tend to discount the products a lot. Sometimes they even lose money on these sales. However, they continue with the deep discounting strategies because these strategies enable them to drive their competition out of business.

In the future, e-commerce portals may not be allowed to use predatory pricing. The policy is explicitly being created to ensure that there are fewer distortions between online and offline market prices. The government knows that if these changes were abruptly introduced in the marketplace, it could create certain problems. This is why they are planning to give a sunset period of two years in which the international e-tailers can systematically phase out their business model based on deep discounting.

Data Localization: The Indian government is also planning to tighten the screws on the way in which data is being used by companies like Amazon and Flipkart. Although lots of data related to Indian consumers is generated on these websites, they have located their data centers abroad. The Indian government wants to change this. This is the reason why tax breaks are being offered to companies who are willing to set up their data centers in India. Once again this will favor the local players more than it will favor the international companies. The Indian government also wants access to all the data that is generated on any website for national security or public policy purpose.

Differential Voting Rights: The draft policy aims at looking at foreign-based companies only as investors and not as promoters. This can be gauged from the fact that the draft advocates creation of differential voting rights.

This means that promoters of e-commerce companies who are Indian nationals must be given more voting rights than foreign investors. Therefore, even if foreign multinationals have more money invested in a company, the Indians could continue to exercise more control over the operations of the firm. Obviously, this is not acceptable to multinational e-commerce firms.

Emphasis on Made-In-India: The government’s new policy will allow foreign multinationals companies to invest in Indian e-commerce companies which hold inventory. They may be allowed to hold up to 49% stake in such companies. Earlier, the permissible limit was 0%! However, there is a stipulation. 100% of the products being held in the inventory of such companies must be Made In India.

Hence, the government is using the draft e-commerce policy to encourage multinational companies to add to the Prime Minister’s Make In India campaign. The Indian establishment seems to have realized that e-commerce is poised to become more powerful than the brick and mortar establishment.

Therefore to increase employment and to give a boost to the local industry, it must somehow be amalgamated into the e-commerce model. The multinationals should not ideally have an objection to this rule. None of the multinational firms have used India as a dumping ground for their foreign made products till now.

To sum it up, the draft e-commerce policy favors Indian promoters and companies over multinationals. Under normal circumstances, this would be seen as discrimination. However, given the current situation, this only seems like a retaliatory measure created after America threatened to impose tariffs. Whether the government will abandon these measures mid-way or whether it will follow through with them, still needs to be seen?

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