Author(s): Raghu Gopal
At the end of December 2018, the Indian government announced a series of new rules for the e-commerce market in an effort to create a more level playing field in the country's retail industry.
Announced by India's Department of Industrial Policy & Promotion, the rules ban e-commerce players which operate a marketplace from selling their own products, that is, goods that are made specifically by or for them. This will be considered the case if an online retailer buys more than 25 percent of a supplier's products. Furthermore, the e-commerce company can't have an equity stake in any of its suppliers. The restrictions encourage a complete legal separation between manufacturer and retailer, and mean that any supplier or seller could not rely exclusively on any one online marketplace.
The aim is to make competition fairer by allowing smaller retailers to compete against massive foreign-backed companies. However, the rules will change the types of deal that many Indian consumers have come to expect. For example, exclusive flash sales, such as when Xiaomi or OnePlus smartphones are sold at heavy discounts through only one online shopping platform, will no longer be allowed. The guidelines could also affect expedited delivery services like Fulfilled by Amazon and Flipkart Assured, as these are often offered on goods from specific sellers only.
The new measures should benefit smaller online retailers as well as bricks-and-mortar stores. India's e-commerce market is still a relatively small segment of the retail industry, but it has been growing very quickly and connectivity expands across the country.
Kunal Bahl, founder of Snapdeal, clearly welcomed this decision, saying that "Marketplaces are meant for genuine, independent sellers, many of whom are MSMEs [micro, small and medium enterprises]. These changes will enable a level playing field for all sellers, helping them leverage the reach of e-commerce".
The change is happening during an election year, and, with the vote coming up in May, India's current Prime Minister, Narendra Modi, could use all the help he can get to secure a second term. New stricter rules have long been demanded by offline retailers, which point out that thousands of jobs are at stake if Amazon and Flipkart are allowed to continue to use their deep and foreign pockets to fund heavy discounts.
The restrictions will kick in on 1 February 2019, so we will begin seeing the effects in several weeks. We expect the fantastic momentum online shopping has enjoyed over the past few years to slow somewhat in the short term. But the genie is out of the bottle and Indian consumers are now accustomed to the convenience of shopping online. Any lost business can be expected to bounce back after initial hiccups.
On the surface, the rules are significant, but Amazon and Flipkart are certainly looking for ways to delay implementing them, such as filing a petition with the government for more time to comply. Amazon's joint investment with Samara Capital in Witzig Advisory Services in September 2018 is designed to work within the new guidelines: Witzig will acquire India's fourth-largest grocery and retail store chain, More.
To be clear, the goal of the Indian government isn't so much to slow the growth of Amazon or Flipkart, but to get them to adhere to the spirit of its foreign direct investment policy as well as encourage and support "mom and pop" stores. How much impact this will have is unclear, as there's some confusion as to what is and isn't allowed under the new rules. Retailers will have to soldier through the uncertainly during 2019.
This development reminds us about the potential for similar regulations in other countries, given the incredible influence and scale Amazon has in markets in which it operates. We believe that other nations will be monitoring the effects of India's new e-commerce rules on the sector. This includes governments in many Western markets, where Amazon's influence is beginning to alter local and regional economies as many once-mighty retailers falter.