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India’s e-commerce sector has grown leaps and bounds in the past decade. With large youth demographics and increasing digital literacy and mobile users across India, the e-commerce sector is not going to slow down in India anytime soon. At present, the e-commerce sector has a market size of around $25 billion dollars and is expected to grow into a $200 billion industry in the next decade. The size of the digital economy in India will be $1 trillion by 2022 and it will account for close to 50% of the entire economy by 2030 according to the finance ministry. However, the union government wants to create a new e-commerce policy to bring all the laws dealing with different aspects of the sector. The draft policy that was made public recently, looks to do the same all in while adding new regulations to the e-commerce sector. The draft policy drew a lot of criticism as well as appraisal from different interest groups. This article seeks to present the implications of certain provisions in it like restrictions on deep discounts, preference for RuPay, a compulsion to store user data in India, etc.

The draft looks to be in line with the recommendations made by the Sri Krishna committee on data privacy to store Indian users’ data in India. The draft policy mandates the e-commerce companies to store the user data in India within two years. The data include community data collected by Internet of Things (IoT) devices in public space and data generated by users in India from various online sources such as e-commerce platforms, social media, search engines, etc. This is deemed to be a definite clause in India’s upcoming data privacy law. European Union’s General Data Protection Regulation law that came into force on May 25th also mandates the online platforms to store their user data locally. The government need such restrictions to fight cyber crimes effectively in the digital age as the extra-terrestrial laws that deal with data protection are very complex. It also takes a lot of time to seek data from other countries while abiding by that country's judicial and legal processes.

There also many concerns about the right to privacy aspect of the law. The draft does not talk about how it protects the privacy of users or any framework that regulates government’s access to users’ personal data. Moreover, the e-commerce companies would require more clarity on the kind of data that can be transferred outside India as they would need the data to process. Many Indian companies use the facilities of cloud-based storages and solutions like Amazon Web Services (AWS) and mandating them to store in locally will affect their operational cost and efficiency. The bullish e-commerce sectors will be strained for at least two to three years as they would incur extra costs to set new data centres in India. The onus is on the government to clearly define the data they want mandatorily stored in India and limiting it to pre-defined security and personal data. It may not be feasible to store copy all kind of data in India as recommended by Sri Krishna committee.

The government also want to promote the use of RuPay for a better understanding of future financial flows and create a level playing field with the foreign players among many other reasons. Visa and MasterCard card networks control the lion share of payment network in India. Whenever a bank wants to introduce a debit or credit, it has to pay additional fees and transactional charges for every transaction. Introduced in 2012 by National Payments Corporation of India (NPCI), RuPay is India’s first and only domestic card network and payment gateway. Any Indian bank will provide the new account holder with RuPay debit card. Having a domestic card network will help the government in the better implementation of its economic and social initiatives like the Jan Dhan scheme and other financial services. This is because the lower transaction charges and processing costs can act as a driving factor to extend banking support to the vast unbanked segments in India, especially in the rural areas. Also, all the transaction data and customer information processed through RuPay reside within India in line with the previous clause about data storage in India.

The draft also mentions future restrictions on the deep discounts given by the e-commerce giants in their platform. Deep discounting is a short-term strategy used to obtain loyal customers. It also affects the market share of the rest of the local retailers. To address that issue, the draft proposes to limit the timeframe of discount period and restrict the company’s ability to not directly or indirectly influence the price of the sale of goods and services to address the anti-competitive issues in the e-commerce sector. Though the customers have accustomed to yearlong discounts, the traditional brick and mortar shops are having a tough time in fighting the predatory pricing of such companies. Not just brick and mortar shops, other smaller online retailers have failed to keep up with the discount wars and deep discounts of the e-commerce that have deep pockets.

Although this restriction is not going to be received well by the customers a consolidated market will increase the prices of products irrespective of the market dynamics. Even the producers/sellers may have to agree for a higher cut in profit shares from the e-commerce companies in such a consolidated market.

Aggressive tactics like deep discounting are only possible because of the large sums of money that e-commerce companies obtain through FDIs. The local retailers won't have such large capital to compete. In order to create a level playing field, the government looks to have different restrictions for inventory models and marketplace models based on the share of FDI in the companies. Generally, an inventory is an e-commerce entity which owns the goods and services while the marketplace is an entity which is just a platform where sellers and customers interact. The draft policy permits Foreign Direct Investment (FDI) only up to 49% in limited inventory-based business to customer model, provided that the entity is owned and controlled by resident Indians and sells locally produced goods only. To promote local manufacturing and services, the government wants to restrict any foreign inventory but it is willing to permit higher FDI in a marketplace. However, it is quite difficult to implement, regulate and distinguish certain companies like Amazon and Flipkart as they are moving towards a hybrid model to comply with India’s existing FDI laws wherein they basically stay as marketplace while attaining large stake in Indian sellers.

Another welcoming clause is oversight of mergers and acquisitions of e-commerce companies. It gives the responsibility to the Competition Commission of India (CCI) to consider amending its thresholds and mandatorily examine major mergers and acquisitions, especially those that are touted to cause major disruption. It seems to have the amount of money in a deal is worth to be calculated by CCI and restrict the mergers and acquisitions crossing that limit. Any such valuation by the government is set to face criticism from either of the companies. It can be seen an overreach of the government to set such regulations. There was also a concern of acquisitions and mergers leading a way for foreign-made goods to be introduced through the Indian companies subverting the restrictions on foreign inventories.

The draft policy mandates the prohibition of bulk purchase of branded goods such as electronic products (especially mobile phones), white goods, and branded fashion by related party sellers. The bulk purchases would lead to distortion of the market price of the products. Basically, the e-commerce companies tie up with the electronic companies to sell exclusively through their platform or give excessive discounts when the product is introduced into the market. This practice plummets the sales in brick and mortar retail shops and can distort the price of the product. For the same reason, the draft mandates the companies to sell the products at the same price in online marketplace as well as their physical retail shops.

The government also looks to create a regulatory board for overseeing all the implementations of the above clauses. It will be frivolous to have a single regulator for a sector that has too many verticals. The companies provide financial services, fashion products, electronic products, etc and each of those companies that have a very different supply chain and are under the preview of different departments. Anti-competition laws and laws against predatory pricing are need of the hour. The government’s objective seems to create a level playing field, protect small and medium scale Indian companies and data protection. However, many of the draft points are half-baked and needs to plugin the practical difficulties keeping market and customer needs above all. It should have more consultation with all the interest groups of the industry from traditional stores and e-commerce companies. It should be careful in refraining itself from creating an overreaching law. It should also try not to hamper the growth of the sector by restricting the investments at its prime time.

 

 

References:

Deep, A. (Aug 7, 2018). Draft National E-commerce Policy: data localisation and priority to domestic companies. Medianama. Retrieved from https://www.medianama.com/2018/08/223-draft-national-e-commerce-policy-data-localisation-and-priority-to-domestic-companies/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+medianama+(Medianama:+Digital+Media+In+India)

Economic Times. (July 31, 2018). Explained: The policy that could kill deep discounts by e-commerce firms. Retrived from https://economictimes.indiatimes.com/news/et-explains/explained-the-policy-that-could-kill-deep-discounts-by-e-commerce-firms/articleshow/65215220.cms

Fioretti, J. (Feb 26, 2018). Europe seeks power to seize overseas data in challenge to tech giants. Reuters. Retrieved from https://www.reuters.com/article/us-eu-data-order/europe-seeks-power-to-seize-overseas-data-in-challenge-to-tech-giants-idUSKCN1GA0LP

Razorpay. (May 15, 2017). How Rupay is transforming India. Retrieved from: https://razorpay.com/blog/how-rupay-is-transforming-india/

Variyar, M., & Suneja K. (Jul 06, 2018).Ecommerce subgroup suggests FDI in inventory model. Economic Times. Retrieved from: https://economictimes.indiatimes.com/news/economy/policy/ecommerce-subgroup-suggests-fdi-in-inventory-model/articleshow/64877533.cms

Image credits: Dailygkaffairs

 

 

 

 

 

 

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Written By Chanakya Yadav

Bachelors student in Materials Engineering, IIT Madras.

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