new fdi rules. The sting in the e-tail

Several e-commerce companies are hurting after the new foreign direct investment (FDI) rules kicked into effect from February 1. These rules were introduced to address the grey areas through which some companies were making hay. But has the treatment of the problem been correct?

As they say, a correct diagnosis is half the treatment. The continued mis-diagnosis of e-tailing as e-commerce is bound to lead to wrong treatment in terms of policy guidelines.

E-tail is different from e-commerce and the sooner the policymakers realise it, the better. The historical fact was, treating both as one made it easier to justify FDI under the technology umbrella. However, the reality cannot be escaped and the response to this has been lopsided guidelines for e-commerce or rather e-tail, which hinders more than helps. The fundamental flaw is that the earlier stand of considering such businesses as a technology platform instead of retail gives the government very little elbow room to formulate policy without accepting that a mistake was committed in the first place.

Take the example of the recent Press note 2 (2018) released by DIPP with revised guidelines for e-commerce, which is in reality e-tailing. Apart from treating e-tail as e-commerce, the press note has certain guidelines that are confusing and might also adversely affect the very constituents that it seeks to protect.

A few examples

Condition III states that e-commerce marketplace may provide support services, which includes fulfilment, call centre, etc. On the other hand, condition VI states that the delivery of goods and customer satisfaction is the responsibility of the seller. As a shopper, I am not sure as to who would take ownership of my purchases. Simply put, this is akin to stating that a store can sell something but the vendor needs to take ownership of the delivery. So, I can purchase a television but cannot ask the store if the product does not get delivered!

Maximum Retail Price (MRP) itself is an outdated concept and needs to be scrapped in today’s market-driven economy. The irony is that the MRP constrains retailers with regard to pricing while there is no mechanism to determine if the MRP defined by the manufacturer is fair and correct.

If the manufacturer is allowed to set the price based on market dynamics, why can’t the retailer do the same basis their operating cost, especially real estate costs? In that context the statement that marketplace cannot influence the sale price directly or indirectly, in condition XI, is a severe constraint as also a contradiction.

Online travel-related sites, which are more of an e-commerce business, are allowed to have dynamic pricing, including offering discounts. If the government wishes to define a policy about pricing and it is supposed to cover e-commerce, can consumers expect that the same rule would be applied to travel-related sites?

The last example is the condition that e-commerce will not mandate any seller to sell exclusively on their platform. Let us ignore the implications on private-level products and look at this guideline as is.

The first question is; why not? Are we moving back towards a regulated and protected economy? Sellers should be allowed to choose their distribution channels just as how retailers should be allowed to decide what they sell and, more importantly, at what price.

Regulating the choice of distribution makes no logical sense. The next question is; what if the vendor has a limited capacity and chooses to use a single distribution channel? Can the government force manufacturers to distribute at large or not distribute at all?

Right remedy

Let us now consider a policy guideline based on the correct diagnosis of such e-tailing businesses as being in retail and not in the technology platform space.

As there is a defined policy with regard to FDI in multi-brand retail, can those conditions be applied to such online retailers?

I think that this can be done with certain tweaks and, more importantly, will ensure uniformity of policy with regard to retail in India.

Some of the existing retail FDI policy guidelines and how they can be applied to online retailers are as follows –

Invest 50 per cent of their investment in back-end infrastructure and supply chain. This is relatively simple for online retailers to follow as their largest focus is always their distribution centres. Add on a few riders about infrastructure development in the immediate vicinity in terms of roads, etc., and this would also be a developmental model.

Source at least 30 per cent of their sales from Indian producers: This is a better guideline to enforce instead of limiting the sale share of vendors to an online retailer. Clarifying that any such vendor should be an independent business and not a subsidiary of the online retailer or any other FDI-funded entity would make this guideline clearer.

Continuing with the current guideline, the sales contribution for any subsidiary of such marketplaces or other FDI-funded vendors can have a limit.

Some of the other online retail-related tweaks can be as follows:

Data and information on Indian shoppers to be secured inside the country: This would not only protect the data of online shoppers but also offline shoppers from retailers who are FDI-funded. There are several such single-brand retailers who have been given licences and such a data policy would cover all these constituents.

Freedom to deliver across States without the restriction of operating in cities with only a particular population: This would be an important tweak for online retailers as the current multi-brand FDI policy limits the opening of stores only to certain cities with a minimum population level.

The alternative to all these tweaks is to take the comprehensive step of giving industry status to retail in India. Apart from bringing all segments of retail under one overall policy umbrella, segment-wise guidelines can regulate these in accordance with their operating conditions.

Clearly, the correct diagnosis is that this important sector lacks recognition. If this is accepted and retail gets recognition as an industry, the treatment becomes simple, effective, result-oriented. Till then, we would continue to see guidelines and clarifications which are like medicines that suppress the symptoms instead of treating the ailment.

V Rajesh is a retail & shopper behaviour expert and author of The INDIAN reTALEs, Out Of Syllabus, BREAK FREE and The Ultimate Guide to SMART Shopping

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