Government can’t turn the clock back to favour traditional retail

Commerce and Industry Minister Piyush Goyal is distinctly uncomfortable with the rising tide of e-commerce. His real worry is the unease and fear in India’s 20-25 million physical retailers — the traditional support base of the Bharatiya Janata Party (BJP) and the Narendra Modi government — threatened by the competition unleashed by large e-commerce operators, symbolised by the foreign-owned Amazon.

E-commerce is efficient and convenient, and consumers all over India are fast flocking to it.

On August 21, Goyal lambasted e-commerce by targeting his hobby horse Amazon for indulging in ‘predatory pricing’. He retracted partly the next day.

The government has tried to halt the march of e-commerce by putting FDI policy restrictions on foreign players, drafting e-commerce rules to contain significantly large players (not notified yet), and taking other measures. But without much success.

What next? What is in India’s real interest?

Constraining FDI in e-commerce has not worked

Amazon pioneered e-commerce around the world. India saw the likes of Flipkart take its first steps, largely copying the Amazon model. The 21st century is the data and digitalisation century with e-commerce as its engine of growth.

Discomfort with the foreign traders led India to restrict FDI in multi-brand retail and subject single-brand retailers like Apple and Ikea to onerous domestic value addition conditions.

The most powerful weapon used was to restrict the FDI to what is described as the ‘platform only’ companies, distinguished from the ‘inventory model’. With these conditions, foreign-owned e-commerce companies like Amazon could not hold inventory and sell their own branded products.

Companies like Amazon tried to bypass these restrictions by creating associate companies to hold and sell the inventory. The government kept plugging the loopholes. That FDI policy still stays put.

Yet, the likes of Amazon have kept growing in India. Flipkart also flipped into a Walmart company.

Predatory prices

Amazon runs a platform e-commerce company in India. It has brought billions of dollars in FDI. Ostensibly, it is in compliance with India’s foreign investment and other laws. Otherwise, it would have experienced the heavy hand of the government.

Goyal found Amazon’s FDI dollars bereft of ‘any great service or great investment to support the Indian economy’. He believes the ‘predatory pricing’ by Amazon is responsible for the losses of ‘Rs 6,000 crore in a year’, and the FDI brought in only to ‘fill in that loss’.

He echoed the sentiments of the Confederation of All India Traders (CAIT) and its president BJP MP Pravin Khandelwal who want ‘greater scrutiny on foreign investments’.

Most Indian startups, including the e-commerce ones, have burnt capital to acquire customers by providing discounts. That strategy is being increasingly given up, particularly in the last two years, as foreign investors are demanding profitability instead of customer acquisition.

Predatory pricing is an outdated argument now.

Traditional retail is increasingly uncompetitive

Traditional retail has been built on three key building blocks — stocking up the merchandise in the shops to meet customers’ demand instantly, physical visits by the customers to the shop to make purchases, and payment in cash or, in some cases, credit.

Stocking up, besides rentals, requires considerable working capital and results in significant costs. Physical visits are no longer preferred by customers on cost, crowd, and time considerations. Cash is not the currency of the neo-middle class; they make digital payments using UPI etc.

E-commerce relieves customers of all these costs and constraints.

The traditional retailers, at least some, have tried to meet new challenges by taking orders on telephone/WhatsApp, delivering goods to the customers’ houses, and taking payments through UPI. They have, however, not met the convenience and efficiency of e-commerce.

The share of e-commerce is currently below 10%, but it is growing rapidly: estimated to cross 30% in 10 years. Much of this growth will come at the expense of traditional retail.

Stop e-commerce only at your peril

India had a massive handloom cotton spinning and textile industry in the 19th century. India was the world leader in cotton textiles.

Innovations in machinery and production processes in the United Kingdom and elsewhere resulted in many times more efficient and cheaper alternatives to India’s handloom industry. Instead of adopting the new technology, Indian leaders glamorised handspun, and tried to stop building cotton mills across the country.

India lost the modern textile industry battle and became poorer by the day. At the time of Independence more than 80% of Indians were poor. Traditional retail is like India’s old handloom industry. It is an endangered species.

The fittest only survive. To survive, traditional retail essentially has two options.

By reinventing into a local and connected e-commerce retail network providing merchandise (and services) through digital apps (like e-commerce) to beat its larger but remoter competitors in its game for its neighbourhood customers. Or, become a quick commerce stocking and delivery agent in the local area.

Attempts by the government to stop or put hurdles in the way of e-commerce will only delay the inevitable, and make Indian customers suffer in the process.

Let us not stop or delay the transition to modern, efficient, convenient, and cheaper e-commerce. Otherwise, the history might repeat itself.

(Subhash Chandra Garg is former Finance & Economic Affairs Secretary, and author of ‘The Ten Trillion Dream’ and ‘We Also Make Policy’.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.