Of the many conditions in the foreign direct investment
(FDI) rulebook, 30 per cent mandatory sourcing from MSMEs
has triggered stormy exchanges between global players and the Indian government. Many companies
resisted, prompting the government to relax the sourcing guidelines at least in single-brand retail.
The change came with Swedish furnishing brand Ikea’s promise to invest Euro 1.5 billion in 2012. The company, which had once shelved its India plan, stuck to its stand that 30 per cent sourcing from MSMEs
was unfeasible. The Congress-led UPA government had just relaxed the rules allowing 100 per cent foreign investment in single-brand retail, and Ikea couldn’t afford to lose the first big-ticket FDI. Following much back and forth, the sourcing rules were changed. The rules first stated that at least 30 per cent of the value of procurement of manufactured/processed products purchased shall be sourced from Indian MSMEs. In what looked like a minor tweak, "sourced from Indian MSMEs" was changed to "sourced from India, preferably from MSMEs’’. The tweak enabled Ikea to enter, but not Cupertino-based Apple, which claimed meeting the 30 per cent mandatory India sourcing was tough. The iconic company behind iPhone is yet to start a fully-owned signature store in India.
Then there were other majors like Bentonville-headquartered Walmart, which dropped out of its joint venture with Sunil Mittal’s Bharti Group in 2013, saying ‘’the time had passed’’. One of the hurdles was the multi-brand retail FDI condition on mandatory 30 per cent sourcing from Indian MSMEs. Walmart, with its cash-and-carry platform and having acquired a majority stake in Flipkart
for $16 billion in 2018, is still waiting to enter multi-brand which would enable it to open large format physical stores like in the US and elsewhere in the world.
FDI in multi-brand (up to 51 per cent foreign investment in this format was permitted by the UPA government) brings us to the other big hurdle: traders and kiranas or neighbourhood mom & pop stores. The Narendra Modi government, when it came to power in 2014, kept multi-brand FDI policy on hold in a bid to protect small traders and kiranas, an important voting constituency.
The fear of job loss
Now connect the dots in the current context. If Indian traders feared losing employment and business because of deep-pocket foreign majors like Walmart setting up multi-brand retail stores, it’s the same worry when it comes to Amazon
or Flipkart (read Walmart) offering goods at a lower price. If sourcing from MSMEs was mandatory for physical retailers to partially set off the perceived adverse impact of foreign investment on small businesses, the current discourse linked to protecting Indian sellers on foreign e-commerce platforms has the same root.
E-commerce in India generates business of around $40 billion per annum: a small amount compared to the total retail pie at close to $700 billion. ‘’With e-commerce being a miniscule portion of the total retail, it’s far-fetched to say it’s hitting small traders. On the contrary, the MSME sellers are getting to access a growing new consumer base and reaching out to rural India as well through the tech-enabled platforms,’’ according to a source in a large online marketplace firm. According to this executive, things turned noisy due to Delhi elections with traders at the centre of things.
Not one bucket
An analyst argues that it’s important to differentiate between traders, manufacturers and retailers (kiranas) being pitched against e-commerce players. "While retailers and manufacturers are positively impacted by e-commerce, traders working on arbitrage through selling Chinese goods for a higher profit are not," he said. Typically, arbitrage is defined as the practice of taking advantage of a price difference between two or more markets, to make a good profit.
When Anil Bhardwaj, secretary general of Federation of Indian Micro, Small & Medium Enterprises (FISME), is asked whether e-commerce companies
offer any benefits to small businesses, his answer is, ‘’I would say the answer is both yes and no.’’ Everything depends on the volume that MSMEs are able to sell on these platforms, says Bhardwaj. He admits there isn’t enough data to support this, but says the impression is that around 80 per cent of the products sold on platforms such as Amazon and Flipkart is imported. "In the process, domestic manufacturers are adversely hit," according to Bhardwaj.
E-commerce majors deny such claims, saying most products they sell are Indian. Bhardwaj says there’s no denying that e-commerce is powerful and can’t be disregarded, but a safety net (for MSMEs) has to be created. Moving forward, Bhardwaj speaks of partnerships with e-commerce companies and the government to scale up MSMEs and improve their export prospects as well. Some of that has already begun.
What’s on offer
On Flipkart, for instance, there are 200,000 sellers and 150,000 artisans, most of whom would qualify as MSMEs. Their reach at present: 200 million customers of the Sachin Bansal and Binny Bansal-founded company. (Both Bansals--not related to each other--have exited the firm). A Flipkart spokesperson says, "as a homegrown company, we understand that MSMEs are the backbone of the Indian economy, creating lakhs of jobs and fueling the country's economic growth engine. Hence, enabling the success of MSMEs through our marketplace becomes core to our mission of democratising e-commerce in India and contributing to the country's ambition to be a $5 trillion economy by 2025."
Apart from referring to the government’s ambitious $5-trillion economy goal, Flipkart lists the ways it is helping sellers on its platform. Investing in the on-boarding process to ease and improve the first-time e-commerce experience for sellers, enabling them to use the company’s logistics to reach out to every nook and corner of the country, helping them cash in on the partnerships with kiranas and enhancing their analytics capabilities are among the benefits that Flipkart believes it’s offering to the small and medium businesses on its platform. It has signed MoUs with state governments and NGOs for skill development, as well as to strengthen the bond between the e-commerce marketplace and the sellers.
Walmart, too, maintains its commitment towards MSME growth. The American major counts ‘Vriddhi’ as an important milestone in supporting schemes such as the Women Entrepreneurship Development Program (WEDP), which, it says, has provided intensive, highly focused training for women-owned businesses since 2016. Then again in December 2019, it introduced the Walmart Vriddhi Supplier Development Program (Walmart Vriddhi) to train and prepare 50,000 Indian MSMEs to “Make in India” for global supply chains. The objective is to train and support MSMEs to reach both online and offline customers in India and overseas through the supply chains of Flipkart, Walmart India and Walmart Global Sourcing besides other major domestic and international enterprises, according to a Walmart spokesperson. The first Vriddhi institute to help empower entrepreneurs is expected to open in March and over the next five years many such institutes are likely to come up across the country.
The needless snub
When Amazon chief executive Jeff Bezos, the world’s richest man, committed $1 billion investment to digitise small and medium businesses in India earlier this year, the response from the government and the industry was far from welcoming. The finer details of that investment are not known, but Amazon India Marketplace vice president Gopal Pillai told Business Standard about the company’s association with MSMEs. From 100 MSME sellers six years ago, the numbers have risen to 550,000, he says. Through various schemes like Sambhav, Tatkal and Karigar, the company says it has tried to motivate MSMEs. It has meant spending working capital, investing in technology and training. Also, the Seattle-headquartered e-commerce major is inspired by Japanese business development concept—ODOP. Aimed at promoting a competitive and staple product from a specific area to push sales and improve the standard of living of the local population, the concept has been replicated in other Asian countries including in India.
While the allegation against Amazon is that its preferred seller Cloudtail gets a large chunk of the business on the platform (its revenue grew 25 per cent in the year ended March 2019), Pillai turns to the larger ecosystem of sellers. "In 2019, there were as many as 3,500 crorepati sellers and more than 18,000 millionaire sellers on Amazon India platform--isn’t that a big positive impact on MSMEs," he asks.
Praveen Khandelwal, who led traders’ protest against Amazon during Bezos’ visit last month, doesn’t mince words while giving his verdict. "MSMEs have got no benefits from e-commerce companies like Amazon and Flipkart. Rather, they are being crushed by e-commerce companies through predatory pricing and violation of FDI guidelines," he says.
Khandelwal, national secretary general of the Confederation of All India Traders (CAIT), argues that 90 per cent of the business on these e-commerce platforms goes to their preferred sellers and not to the MSME sellers. If there’s no benefit, why are the sellers there on Amazon and Flipkart then? Khandelwal believes registered sellers are not dependent on these platforms, as they have separate businesses going.
At a time when even the Competition Commission of India (CCI) has launched a probe into alleged anti-competitive practices by e-commerce companies, Khandelwal has a bigger swadeshi plan in mind for the estimated at 63 million MSMEs in the country that employ close to 110 million people. The MSME sector accounts for 30 per cent of India’s gross domestic product (GDP), and Khandelwal aims to make it independent from Amazon, Flipkart, or Walmart by launching e-stores from April 1
"We’re not dependent on any e-commerce firm," are his last famous words on the subject.