The government’s flip-flop on its policy on marketplace e-commerce companies seems to be an indication that the country is heading towards a general election and the power of lobbying by influential sections in the country would be on display more frequently in the coming days. Within weeks of its circular that barred marketplace e-commerce companies such as Amazon and Flipkart from entering into exclusive deals for merchandise sales, the government on Thursday clarified that those restrictions did not cover the sale of private-label products through the marketplace.
With over 30 private labels covering more than 200 different categories under their belt, the government’s order on Thursday comes as a relief for both Amazon and Flipkart. But not all their worries are over and the implications of the fine print of the modifications in the policy would be known only a little later.
On the face of it, the earlier government decision was aimed at creating a level playing field for all small retailers who want to sell their products through companies such as Amazon and Flipkart in India. The role of politics was also quite obvious in that decision barring online marketplace platforms from selling products of companies in which they own equity stakes. Marketplace e-commerce is a sector where 100 per cent foreign investment is allowed, but the condition imposed on such retailers is that they can only be a platform for sale of goods from other retail companies.
Foreign investment in retail has always been a controversial political issue in India. The United Progressive Alliance (UPA) government, led by Manmohan Singh, decided to allow 51 per cent foreign direct investment (FDI) in multi-brand retail and 100 per cent FDI in single-brand retail, in late 2011, but not before introducing a unique condition.
India’s FDI policies have never been subjected to state-level clearances. Thanks to stiff opposition from the Bharatiya Janata Party (BJP) and the Left parties, the UPA government incorporated a condition that foreign companies wishing to set up multi-brand retail or single-band retail outfits would have to secure the permission of the states where they would like to operate.
Thus, when the BJP formed its government at the Centre in 2014, there was no hope of any relaxation in the FDI policy for the retail sector. Traders constitute a powerful lobby in the BJP’s vote bank and the fear was that some of the FDI policy relaxations introduced by the UPA may actually be rolled back.
But contrary to all that, what happened in 2016 surprised everyone. One hundred per cent FDI was allowed in the marketplace e-commerce sector. The biggest beneficiaries of this move were Amazon, which had opened an e-commerce outfit in India, and Flipkart, a large company in the online retail space. It was this policy again that encouraged Walmart to consider investing in Flipkart early this year. It invested close to $16 billion in acquiring controlling stakes in Flipkart.
That was also the deal that created a political storm in the BJP. A few senior leaders including the head of the Rashtriya Swayamsevak Sangh, Mohan Bhagwat, questioned the logic of allowing an American company to acquire Flipkart, which was operating in India and had been promoted by Indians. The electoral reverses in three Hindi heartland states of Chhattisgarh, Madhya Pradesh and Rajasthan only helped fuel the internal BJP fire against policies that hurt the party’s vote bank. Organisations representing small traders also raised their voice to demand a change in the policy. With general elections to be held after a few months, the curbs on marketplace e-commerce firms were only to be expected.
A few weeks ago, the government had come out with a policy package to help the micro, small and medium enterprises (MSME) with easier norms for sanctioning loans and a relaxed regulatory framework. A promise was made to grant loans to MSMEs within 59 minutes. Similarly, MSMEs were spared the trouble of approaching the courts for compliance of many routine regulations. Expeditious loan clearances and easier regulatory compliance have of course given rise to a different set of problems. But the government succeeded in sending out a message that it was mindful of the woes of the MSMEs, particularly after they were badly hit by demonetisation.
After Thursday’s circular, large market-place e-commerce companies are now busy re-engineering their businesses to comply with the new norms. The government may still continue to attract foreign investments in new businesses. But the word is out that India is going in for elections and the government would not hesitate from taking steps to address the concerns of electorally significant lobbies in industry and trade, even if such measures mean changing the rules of the game mid-way or a policy flip-flop. As the elections come closer, foreign investors are likely to get a little more wary about committing fresh capital or expanding their business operations till the elections are over. The countdown for the elections has begun.