​The thin silver lining in India's restrictive rules for ecommerce

A more relaxed investing climate would have ushered in desperately needed retail innovation and jobs but these onerous rules have forced ecommerce companies to educate small sellers.
Written by Rajiv Rao, Contributing Writer

Critics of the government's convoluted rules on foreign investment in retail -- which also include foreign investment in ecommerce -- will no doubt think it ludicrous to imagine them to be somehow ironically beneficial in some small way to the Indian ecommerce landscape.

It is painfully true that if eased, these rules that many consider to be borderline draconian would have brought innovation in technology and process, much-needed jobs, and a logistics revolution to an economy that desperately needs it. It would also rescue a struggling farm sector that regularly sees distorted and volatile prices for vegetables along with ruined produce and livelihoods due to the absence of proper cold chain investments.

Yet, could these rules have also unintentionally forced Amazon in India to adopt an innovative model that has boosted the progress of ecommerce? Could it in fact help Walmart in the long years ahead as it tries to make good of its unprecedented and some say profligate investment?

First, some history. While India has thrown open its doors to foreign money for a few decades now, FDI (Foreign Direct Investment) in retail operations have been banned to largely protect the some 14 million small, mom-and-pop shops and traders that comprised an important votebank for major parties.

In 2012, the ruling Congress-led government allowed 51 percent FDI in multi-brand retail (supermarkets and the like) in some cities, subject to the approval of state governments. But the rules were so restrictive -- allowed only in cities with populations of more than 1 million and with riders that mandated at least 30 percent of products needing to be sourced from SMEs and 50 percent of the investment ploughed into back-end operations -- that the initiative found few takers.


Meanwhile, during the infancy of the online boom, ecommerce managed to sneak in under the radar and flourish. For some reason, firms with Indian founders who sourced their financing primarily from foreign investment funds or companies like SoftBank or Tencent carried on without a problem, selling their wares through consumer-facing websites where goods would be stored and delivered from giant warehouses much like Amazon does in the US.

In 2016, however, it all came crashing down. The government woke up to the realization that there was increasingly no parity between foreign-funded online retail outfits compared to offline ones. So they passed a series of rules to redress the balance. Now, 100 percent foreign direct investment (FDI) in online retail of goods and services could be made through the "automatic route" but only using the marketplace model. In other words, you as a business could remain a consumer-facing site but could no longer warehouse and sell anything under your own banner. Instead, as an ecommerce site, you were forced to switch to a model where you were simply a forum for sellers and buyers to transact. The marketplace ecommerce companies were restricted to providing ancillary support to sellers -- things like warehousing, logistics, and order fulfilment.

There was one additional, onerous demand -- no one vendor could offer more than 25 percent of the sales on the site. This was a big problem for Flipkart and Amazon as both had ancillary wings that did exactly this. WS Retail Services sold more than 25 percent of Flipkart's goods while Cloudtail India provided almost 50 percent of Amazon's offerings. Both companies had to now rapidly overhaul the way they conducted business.


Now that a consumer-facing model was no longer a possibility, Amazon had to think fast about how it could develop an ecosystem of sellers with products worthy enough to attract increasingly sophisticated Indian online customers. So, it devised a program called Amazon Chai Cart that used mobile tea carts to make the rounds of neighbourhoods serving refreshments to small business owners while educating them on the finer points of ecommerce.

It was a mammoth undertaking. Apparently, the Chai Cart traveled more than 9,400 miles across 31 cities and worked with over 10,000 sellers. It also brought out Amazon Tatkal, a de-facto "studio on wheels" that armed newbie sellers with startup services such as registration, imaging, cataloging, and sales training.

Another innovative method that Amazon adopted was to rope in mom-and-pop stores in the remote internet-starved hinterland as partners. With online access in rural areas a rarity, these stores became a lifeline for customers who could browse and select goods in these stores and order them to be delivered there. Store owners would then alert their customers when the products were delivered to them and handle the entire transaction, from order to payment and delivery.


Walmart too had to adopt a different entry point to the Indian market considering the onerous requirements of the FDI policy. While FDI in consumer-facing bricks-and-mortar stores were a no-no, investment in wholesale "cash-and-carry" was allowed and Walmart struck up a joint venture with the Bharti Group.

That relationship recently ended with Walmart deciding to go it alone. Now that it has swallowed ecommerce biggie Flipkart, it finds itself with a rare opportunity to leverage the immense gains it has made in all these years of mentoring and guiding the thousands of smaller craftspeople that have stocked its wholesale stores and for whom a logistics and supply chain back-end already exists.

By 2020, India's retail sector is expected to double to $1.1-1.2 trillion from $630 billion in 2015 at a compound annual growth rate of 12 percent, according to industry group Federation of Indian Chambers of Commerce and Industry and PwC.

While India's onerous FDI rules have starved the country of a much needed retail overhaul, it is unlikely that India's small suppliers and tradespeople would have received the kind of guidance, attention, and know-how from these biggies if these companies were simply allowed to import foreign goods from China and arbitrage the spread.


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