It’s time to modernise e-commerce policy

Retail in India has always been mostly unorganised, led by mom and pop stores, kirana and a complex network of wholesale dealers and distributors. It is also one of the most fragmented of Indian businesses with 12 to 15 million outlets accounting for approximately $500 billion a year business. With the advent of power houses like Birla, Reliance, Tata, and a specialist brand BigBazaar, it was expected that organised retail would grow to be a larger part of the retail business.

It is curious that even after years of trying, organised retail has not crossed the double digit share of the overall retail business. This could be attributed to multiple factors, including the high cost of retail space, abysmal investments in warehousing and logistics infrastructure, negligible price advantage, and lack of variety and customer choice.

However with the internet boom and the advent of the smartphone and 3G technology, online retailing took off, growing 80 per cent year on year. Variety, customer choice and low prices were bringing users to e-commerce sites. An estimated 20 million shoppers currently buy online, making close to 60 million purchases every year, and this number is expected to balloon to 174 million online shoppers by 2020 making close to a billion purchases every year. The nationwide rollout of 3G+ connectivity is expected to be a key driver for this explosion in numbers.

However it is also the investment and innovations made by e-commerce companies that support this demand: they have invested heavily in logistics infrastructure, a hitherto under-developed area, ramping up quicker delivery and better warehousing. E-commerce companies have also assisted in lowering prices thanks to competition and kick-started a healthy trend of new product development. It is estimated that in India, items can be bought online at a discount of 10 per cent on average. Some products sell exclusively on e-commerce, unthinkable a few years ago.

Contrary to initial perceptions, e-commerce and online shopping are creating more entrepreneurs and jobs at all levels. More entrepreneurs are being created by e-commerce companies than by business schools. Companies such as Uber, Ola, Amazon, Flipkart and Snapdeal are unleashing micro entrepreneurship in a big way, bypassing the opacity of layers in retail and service business.

Expectedly, this is improving service quality as entrepreneurs are directly answerable to their clientele. Many are profiting hugely because of this. An individual who was making ₹15,000 a month is now making three to four times more doing the same work with little or no startup costs and indirectly employing hundreds more. This explosion and distribution of income is likely to impact income growth and development in all parts of India.

However, it needs to be managed well for it to sustain. E-commerce companies would have to invest close to $25 billion over the next five years in ramping up warehousing, delivery, data centres, customer service, product development and, of course, technology upgradation. This would result to the creation of 700,000 jobs directly and millions more indirectly.

This presents a great opportunity for India, as most of this investment will be injected via FDI. To see this in perspective, this quantum of FDI in a single sector has not been projected since investment in telecom opened up. It would also trigger large-scale investments by product manufacturers to make and sell in India. Xiaomi, for instance, is setting up a plant and data centre in India, based on the success it has seen on selling exclusively through the e-commerce channel.

On the flip side, there could be a blip in momentum if policy does not keep pace with the spiralling growth of the sector. The current restrictions in FDI in e-commerce and uncertainty in tax policies may be a stumbling block.

A rationalised investment policy that fosters job creation and backend investments in ‘Make in India’ and logistics may impact India positively in the same way that investments in telecom did. Any regressive or needlessly protectionist theories at this juncture could hijack the sector and jeopardise this stunning growth. It is time to uncork the sector, if the champagne has to flow.

The writer is a managing partner at India Opportunity Advisors

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