India issues new e-commerce rules to check Amazon and Flipkart

Reeling from recent electoral losses, the BJP government’s latest e-commerce stance is an attempt to woo back small retail traders, say industry observers.

Late on Wednesday, the Indian government introduced new rules for India's e-commerce industry that could have grave new implications for how foreign online retailers decide to do business in the country. Specifically, the government banned online retailers Flipkart and Amazon from sourcing more than 25 percent of their inventory from a single vendor -- many of them in which these retailing giants hold stakes. 

The ruling also prevented these two e-commerce biggies from entering into exclusive deals.

"Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25 percent of purchases of such vendor are from the marketplace entity or its group companies," said the ruling also known as the updated Press Note 3. 

Amazon's operations in India are likely to suffer the most immediate hit considering that most of the major sellers on its site are companies into which it has invested, including Cloudtail and Appario -- Cloudtail is a joint venture between Amazon and Infosys icon N.R. Narayana Murthy's Catamaran Ventures.

Flipkart may not appear to have suffered as grievous a hit since its exclusive seller, WS Retail, apparently stopped functioning in August.

However, the company makes a fountain of its revenues through exclusive deals -- for instance, it sold more than 3 million smartphones on just one day in October via pacts with smartphone brands such as Oppo. Now, all such exclusive agreements with important sellers such as RetailNet, Super-ComNet, and OmniTech Retail will be rendered null and void.

Considering smartphones represent over 50 percent of e-commerce sales, this could create a tragedy of epic proportions.These rules, more than anything else, represent the vulnerability of the nationalist, right-wing BJP government that is reeling from significant losses suffered at the hands of its arch rival Congress in a series of local elections, say observers.

See: Amazon's Hindi website shows how badly e-commerce needs India's non-English-speaking shoppers

One of the biggest bases for the BJP were India's small traders, millions-strong, who had filed several complaints in the past about suffering at the hands of deep discounts issued by the likes of Amazon and Flipkart. Competing with the deep pockets of global capital that compelled these companies to flog goods at steep losses in order to grab market share from each other meant that the smaller offline trader would become the first casualty of this internecine war.

At that point, it increasingly looked like the government was going to intervene on behalf of their important vote base which I wrote about last month. However, the Competition Commission of India, which stands guard as an industry watchdog, declared recently that nothing was amiss with Flipkart and Amazon.

"Looking at the present market construct and structure of online marketplace platforms market in India, it does not appear that any one player in the market is commanding any dominant position at this stage of evolution of market," the Commission said in its decision. The government, not surprisingly, decided to let sleeping dogs lie since it probably thought itself on secure political footing.

Then came the disastrous setbacks for the BJP in elections across Hindi-speaking states that represented its heartland, and lo and behold, a reversal in its retail policy.

As I said previously: "After all, India's massive general elections are just around the corner, and nothing rallies votes as well as national policy that defends the common man. So don't be too surprised if this position is dramatically reversed once again."

Having been vindicated, here's my corollary: Don't be too surprised if these e-commerce rules are once again flipped in the event that the BJP win the national election in April. With no further need for the common man if that happens, big business will be once again wooed with vigour while the small retailer will be hung out to dry.

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