Last week, the government recast rules for ecommerce companies, intending to prevent predatory pricing and deep discounting. That means ecommerce companies such as Amazon and Flipkart Group, now owned by American retailer Walmart, will not be able to sell products from companies in which they own equity or form exclusive agreements with sellers from February 1.

The new rules follow intense lobbying by large swathes of small shopkeepers, particularly after Walmart spent $16 billion to acquire Flipkart this year. Here are nine reasons why the government decided to rework the ecommerce rules.

Levelling the playing field:

The new rules are aimed at levelling the playing field between online and offline retailers. Offline retailers have been lobbying with the government that online marketplaces, flush with foreign money, are driving brick-and-mortar stores out of business. E-tailers such as Amazon and Flipkart were adopting “discriminatory” and “predatory” pricing to attract customers by offering deep discounts, according to them. They cited smartphone flash sales, and festive season sales of fashion and electronic products as examples of such predatory pricing.

Case for mom-and-pop stores: The government’s move comes after Indian traders complained that they were being put out of business. E-tailers get into exclusive tie-ups for deep discounts with brands and also push products of preferred vendors which they partly own or have preferential contracts. Such heavy price markdowns, while very attractive for consumers, have seriously impacted the business of mom-and-pop stores as also large offline retailers selling the same brands.

Matter of livelihoods: The new rules appear to be the Modi government’s way of demonstrating its intent to walk the talk in support of the local traders. The government does not want to endanger the livelihoods of millions of local offline traders—from big retail chains to neighbourhood kirana stores.

Enforcing law in letter and spirit: Amazon has invested in joint ventures to create vendors — Cloudtail and Appario Retail — which sell on its platform. This is a roundabout way to stock inventory and disobey the spirit of guidelines of FDI in commerce. Under the new rules, ecommerce companies will have now furnish a certificate along with a report of a statutory auditor to the Reserve Bank of India (RBI), confirming compliance of these guidelines, by September 30 of every year for the preceding financial year, indicating that the violations will be strictly dealt with.

The importance of the unorganised and offline retail sector: The new rules put into perspective the vital significance of the unorganised and offline retail sector. The vast majority of retail still happens through brick-and-mortar stores (about 97 percent, according to government estimates. The rest is online). And the retail sector is mostly unorganised, to the extent of an estimated 92 percent.

The primary job creator: According to National Skill Development Corporation (NSDC), India will need 56 million skilled workers in the retail sector by 2022. The retail market itself is projected by the government to reach $1.3 trillion by 2020. The job growth, clearly, is not going to come from online retail. Flipkart’s full-time workforce, for instance, consists of about 10,000 people.

Bulwark against duopoly: Flipkart and Amazon together account for about 70 percent of the value of goods sold online. There is a danger that India could be heading towards a foreign-owned retail duopoly if Flipkart and Amazon continue to grow unchecked. Or an oligopoly, with China’s Alibaba also slugging it out. The losers will be Indian companies and, eventually, Indian consumers.

Lessons from America: The US retail landscape is littered with once-iconic brands that have become the casualties of Amazon. In India, retail could be killed off before it even grows to full potential if online marketplaces behave like online retailers and indulge in predatory pricing and anti-competitive behaviour. Big-name US retailers are shutting stores or filing for bankruptcy. In October, the 125-year-old Sears filed for bankruptcy, marking the end of an era. Last year, Toys ‘R’ Us, a revered brand founded in 1948, filed for bankruptcy. Every store shut means hundreds of jobs gone and families dislocated irrevocably. Shuttering stores and layoffs are commonplace now—think Target, Staples, Macy’s, Barnes & Noble. The list is endless.

Clarity of rules: There is an unreported subsidisation of products by ecommerce players that was increasingly taking place. In the marketplace model, the ecommerce entity should be neutral to all vendors. In July, the government came up with the first leg of the draft ecommerce policy, which talked about allowing these companies that have FDI of up to 49 percent to switch from a marketplace model to an inventory-led model. The idea was to promote the sale of domestically-produced goods on online platforms under the government’s Make in India initiative by allowing B2C online retail companies to keep limited inventory. However, offline traders didn't take to the proposal kindly with Swadeshi Jagran Manch (SJM) and Confederation of All India Traders (CAIT), criticising it for allowing backdoor entry for FDI in B2C retail. The government is now expected to come out with a final ecommerce policy that will likely propose the setting up of a sector regulator—a quasi-judicial body empowered to enforce rules and crack down on violators.

First Published:Dec 31, 2018 5:50 PM IST