Roundup of the week (March 27 – April 2) – Economics

Part 1 discusses FDI in e-commerce

#1. FDI in e-commerce

Before coming to the actual policy announcement and nitty gritty of that, it’s important to understand some basics without going into technical details (various comments on our e commerce story).

What is e commerce?

Simple, electronic commerce i.e buying and selling of goods and services using electronic or digital means

It can be done many ways

#1. Inventory led model – It’s simply like your kirana store or Walmart if you will i.e. you own what you sell. Suppose, I want to open my e commerce firm. I will start mt website (drvbaniyastore.com) buy and stock all the goods I want to sell and deliver them to consumers. It’s actual retailing.

#2. Marketplace model– It’s like your mall, say select city walk Saket . Different vendors, Lewis, Svmsung, apple, individual service providers (mobile repair shop) etc can open their shops in the mall. Consumer comes to mall, shops from different vendors, Mall only connect buyers to consumers. So, if I want to start my own e commerce firm, I will start my website, different vendors will be listed on my website, consumers will choose products they like from vendor they like. My task would only be to connect consumers to vendors and producers.

#3. Hybrid model- mix of both

Then there is B2B and B2C.

B2B or business to business– It’s like wholesaler or producer shipping goods to retailers i.e. they do not supply goods directly to consumers. For instance, consider apple factory which would supply iphones only to retailers like mobile store.

B2C or business to consumer-  It’s like your kirana store, actual retailing.

So, what was the policy until now?

# Until now, 100% FDI in B2B commerce was allowed.

# FDI in multi brand retail though allowed at 51% (announced by UPA govt in 2012) comes with many riders and present govt does not support the policy. Effectively FDI in multibrand retail is not allowed.

# There was complete lack of clarity with regard to FDI in e commerce (market place model)

e commerce firms took advantage of this vacuum and confusion to bring FDI through complex structures and this policy attempts to bring some clarity and sanity in this sector.

What’s new in the policy that is making headlines?

Policy allows 100% FDI by automatic route in e commerce market place model <makes eminent sense, they are just connecting buyers and sellers>. Flipkarts and Amazons and Snapdeals were already opearting under this model and policy merely makes de jure what has hitherto been de facto. <Tell us the meaning of de jure and de facto in comments>

It restrict sells from a single vendor to maximum of 25% <makes sense, in a well functioning market, one vendor should not be allowed to concentrate all the sales>. But problem is for both Amazon and Flipkart their biggest vendor account for >40% of sales.

the responsibility for both delivery and quality of the product and related warranties will lie with the seller <again makes sense, if you buy some product from a store in mall, you don’t go to mall manager to claim your warranty but manager of that particular shop. But think what happens to that Flipkart advertisement about return of goods. Does not appear a consumer friendly initiative>

But e-commerce firms can provide support services to sellers, including warehousing, logistics, call centres and payment collection <makes sense to me. Even a mall provides some support services to it’s vendors>

prohibits ventures from “directly or indirectly” influencing the sale price of goods <makes sense, whatever discounts etc are given, are given by vendors not malls so how can Amazon give you discount> i.e vendors can still offer discounts but marketplace i.e amazons and Flipkarts of this world can’t influence prices.

This indirectly provision is very interesting.

Let’s see at present how discounts work <indirectly influencing the prices> step by step

#1. Amazon recommends the amount of discounts to its sellers on products, but doesn’t force them to adopt these suggested prices.

#2. Sellers, however, end up keeping these suggested prices because Amazon finances the discounts

#3. At the end of a certain period, sellers send a debit note to Amazon. This note contains the amount of discount that the seller gave on apparel, electronics, toys and other products sold on the site.

#4. Amazon then pays the seller by cheque.

All of it is shown as promotional funding/ marketing expense. Of course, we can all see how Amazon is trying to bypass regulations.

#1. It disallows any FDI in inventory led model <again makes sense. Inventory led model is actual retailing. If you don’t allow FDI in multi brand retail how can you allow FDI in retailing through backdoor using digital means>

#2. By the same logic, hybrid products are also disallowed <they include component of inventory>

One major effect of disallowing FDI in inventory led model is that e tailers who were selling goods with their brands will no longer be able to do so. <You are the owner of your own brand i.e you own inventory and FDI there is not allowed. This might create problem for Myntras of this world who sell their own fashion brands but also other brands>

But 100% FDI was already allowed in single brand retail i.e Nike can sell it’s own product but products of no other brand. This policy allows Nike to sell their branded product online also.

Announcements related to e commerce in the past

#1. Budget allowed 100% FDI in marketing of food products produced and manufactured in India.

#2. In November last year, the government allowed a manufacturer to sell its products manufactured in India through retail e-commerce.

Now let’s come to the larger issue of merits and demerits of the policy

– Policy clarifies the provisions wrt marketplace model. There were concerns that even this was not allowed <there are cases in high courts, ED is investigating claims of FEMA violation. Btw can you tell us someyhing about FEMA and FERA? Answer in comments>

– Unambiguous stance on inventory led model

But why does govt not permit FDI in multi brand retail?

simple- Employment/Jobs- Largest employer outside agriculture. Concern that Walmarts and Tescos of this world will wipe out your kirana stores. <both sides cite their own studies>

What’s the problem with discount? They were helping consumers, no?

Opponents say that those discounts are example of predatory pricing. These companies are incurring massive losses due to discounts but are acquiring customers. Venture capital and private equity backing them have deep pockets. They will discount till they drive competitors <your kirana store> out of market and then enjoy an oligopoly.And in any case how can a marketplace offer discounts. They should be offered by vendors <can you differentiate venture capital, angel investor and private equity>

Concerns of JNU Jhola Chaap Professors and Jholachaaps sitting in RSTV studios

#1. It’s clear they were violating the law earlier. Instead of punishing them, govt is actually rewarding them by legitimizing their business.

#2. They will keep on violating the law i.e employ inventory led model, deep discounts etc with impunity<they know govt will legitimize that too>

#3. Even if govt wanted to take action, govt does not have the capacity to monitor their businesses and take action

#4. Influencing prices directly or indirectly is too vaguely worded and their hotshot lawyers will take care of this provision

#5. It will hurt interests of small kirna stores and ultimately consumers

My take (obviously shamelessly borrowed  from multiple sources)-

#1. It seems like a good policy which bring clarity to the sector.

#2. Supply chain efficiency and multi brand retail will ultimately be required to build warehouses and store agri and other products.

#3. We need not fear the foreign competition but empower our kirana stores to become more efficient and cost competitive. They will be forced to innovate and that’s good thing.

#4. Govt’s role is to provide social safety nets not to prevent technological disruption.

#5. Of course all anti competitive practices, price rigging etc should be strictly dealt with and for this we need to empower competition commission of India both by a better statute and better financial and human resources.

Please follow this story -E coomerce the new boom – to read live running commentary in newscards on e commerce

If you want to read more, these four Livemint articles will provide you the best understanding

  1. Half-Hearted attempt to liberalize
  2. Govt allows 100% FDI in eCommerce
  3. Will it stop online discounts
  4. Govt warns on discounts

Update on Solar Dispute in WTO (covered in last round up)

#1. By focusing its arguments (or future measures) on the goal of developing a manufacturing capacity that serves a domestic demand not adequately served by international markets, India might have greater success

#2. Given the breadth of local content requirements within the United States, India could also eventually bring a claim against the United States based on these programmes.

By Root

Caretaker @civilsdaily