Will Flipkart and Amazon kill India's retail industry?

Should India follow China's example and protect its startup scene by placing limitations on foreign companies? Or should it accept that global capital is an integral part of Indian entrepreneurial success and allow for firms funded by it to have unfettered play? So far, India has allowed firms such as Amazon, Facebook, and Google to dominate its e-commerce, social, and search sectors, whereas its neighbouring countries have effectively cut them off at the knees.

These questions have gained widespread attention as India wades into an uncertain technology landscape. They will be a hot talking point, especially after the conclusion of the Hindu festival of Diwali that took place in the early part of November. Diwali is one of India's most vigorously celebrated affairs, filled with ozone depleting firecrackers, oil baths, and diabetic shocks to the system thanks to otherworldly delicious sweets.

The festival, which celebrates Hindu god Rama's return to his kingdom Ayodhya after 14 years in exile, heralds a celebration of renewal -- everyone dons new clothes and buys new things like cars, fridges, and phones. Naturally, the Diwali season has traditionally put a big smile on Indian retailers, but that is no longer the case.

DEATH OF OFFLINE RETAILERS?

Indian retailers have urged for action to be taken regarding Flipkart and Amazon 'illegally discounting' prices on their platforms, as they believe that the offline world can no longer compete. For context, venture money raised through bottomless coffers abroad have been funnelled into subsidising what are continuous fire-sales of goods, in order for Flipkart and Amazon to grab market share, say critics.

As expected, Amazon and Flipkart both continue to deny this. During Diwali, the sales activity on these sites were at fever-pitch, with discounts allegedly being as high as 90 percent, as these two behemoths of Indian e-commerce take online sales supremacy.

Meanwhile brick-and-mortar retailers, who traditionally made a big chunk of their annual profits during the Diwali period are getting eviscerated, they say.

"Amazon's use of subsidiaries to offer large discounts has been the single biggest killer of small businesses in this country," stated founder of online marketplaces ShopClues and Droom Sandeep Aggarwal in the Financial Times, who went on to advocate China's digitally protectionist policies.

See: Why Walmart could get severe indigestion from its Flipkart acquisition

"The lack of adherence has disadvantaged millions of genuine small online sellers, who are unable to compete as large marketplaces themselves behave like sellers by controlling inventory and influencing price," observed Kunal Bahl, co-founder and chief executive of New Delhi-based Snapdeal, in a Mint article.

Snapdeal is a distant third in popularity for Indian e-commerce, but it is the first to have transitioned to a marketplace model in the country.

POLICY ORIGINS

Things first got stirred up earlier this April when a retail association that included small shops as well as behemoths Future Group and Reliance dispatched a letter to Suresh Prabhu, minister of Commerce & Industry, alleging that many of India's e-commerce players were flouting India's foreign investment regulations by influencing prices on their platforms, which is contrary to what is permitted under a marketplace model.

The retail policy in India has been a source of much confusion and dissent. For decades since independence in 1947, India did not allow foreign retail players into its market to protect the millions of Indian shopkeepers and their livelihoods from a foreign supermarket invasion.

The Indian government finally relented in 2012 by allowing 100 percent investment for single brand retailers like Gap or H&M, and 49 percent investment for multi-brand retailers.

However, firms like Walmart were blocked out from possessing majority-ownership of their operations since their offerings competed directly with India's million-plus traders and small shops. Walmart was, however, allowed to commence wholesale operations known as 'Cash and Carry', which paradoxically became a big hit for these assorted small shops who would flock there to stock up.

Also: Reliance is betting that it, and not Walmart, will be Amazon's arch-rival in India

Then came the rise of e-commerce and along with it, a great, big, old policy muddle. Flipkart, India's biggest online shopping mall, started selling things that have traditionally only been stocked by brick-and-mortar retailers.

Despite Flipkart being initially created by two Indians, the capital deployed as venture money was largely foreign. Softbank and Lee Fixel's Tiger Management were the majority investors, and in a brazen and somewhat shameful espousal of naked self-interest, Sachin Bansal founder of Flipkart kept complaining publicly that firms like his, needed more safeguards despite its gargantuan foreign backing and monopolistic position. In other words, the only-single-brand policy seemed to not apply when it came to the internet.

After years of ignoring this loophole, the Indian government in 2016 finally decided something had to be done and came out with two major policy shifts: the first being that e-commerce firms like Amazon and Flipkart, which make up 70 percent of Indian e-commerce but around 4 percent of retail, were not allowed to hold any inventory; the second was that e-commerce firms were not allowed to source more than 25 percent from a singular entity. The Indian government thought that these policies would stymie any direct or indirect influencing of the pricing of goods it was thought.

Or so it seemed, until it became apparent that deft workarounds to this obstacle -- such as getting Indian-owned front-end entities to perform invoicing and partially foreign-owned entities handling the back end -- were quickly engineered. Still, it was hoped that the government, especially this purportedly nationalistic government, would get into action and safeguard the interests of its vote bank of millions of retailers.

HELP AROUND THE CORNER?

Consequently, two things happened this year that raised the expectations and hopes of those protesting the foreign invasion via complaints to Commerce Minister Prabhu. One, the case was kicked over to the industry watchdog -- the Competition Commission of India (CCI). Two, an e-commerce draft policy was created where among considerations regarding local storage of data generated during e-commerce transactions, it was hoped that stringent measures would be put in place against majority foreign-owned firms for deep discounting. These foreign firms, namely Flipkart and Amazon, were pointedly kept away from these policy discussions while Reliance was deeply involved and influential in the sculpting of the draft.

The draft policy specifically trumpeted "the need to preserve flexibility and create a level-playing field to enable formulation and implementation of appropriate policies in the future for encouraging domestic innovation and boosting the domestic digital economy to find its rightful place with dominant and potentially non-competitive global players."

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

A sunset clause would be introduced so that firms currently performing deep discounting would be given the opportunity to phase it out. The draft also suggested a single regulator to govern the industry. The clipping of foreign firms' wings was viewed to be a foregone eventuality.

AN ABRUPT U-TURN

In what is undoubtedly going to drive India's offline retailers to despair is the recent ruling by watchdog CCI that nothing seems to be rotten in Indian e-commerce.

"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.

To add salt to injury, the government then executed a mystifying about-turn.

"It seems that the [e-commerce] industry doesn't need a policy, but a set of rules will help in taking the industry to the next level," a senior Commerce Ministry Official said to Indian tech website Factordaily.

Clearly, the BJP government is now suddenly afraid of being accused of stymieing a $38 billion industry that is slated to grow to $200 billion by 2026, as half a billion potential shoppers come online as India's next wave of internet adopters.

Judging by these dramatic ebbs and flows of government inaction, action, and opinion, it is anybody's guess as to how things will unravel in the near future. 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.

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