India’s tough e-commerce norms bound to damage investor outlook

A customer carries a basket while shopping for school supplies at a Wal-Mart Stores Inc. location in Burbank, California, U.S., on Tuesday, Aug. 8, 2017. Wal-Mart Stores is scheduled to release earnings figures on August 17. Photographer: Patrick T. Fallon/Bloomberg Photo by Bloomberg

On Monday, financial services firm Morgan Stanley published a report that said Walmart-owned online retailer Flipkart and its arch rival Amazon India would be hit by higher costs and slower sales growth because of India’s new e-commerce laws.

In its report, Morgan Stanley said Walmart, which paid $16 billion for a majority stake in Flipkart last year, was unlikely to walk away from India. However, Morgan Stanley said that “… as Amazon did in China, it may make sense to potentially walk away if Walmart can’t see a long-term path for profits”.

Surprisingly, Morgan Stanley offered no comment on whether Amazon may walk away too. Neither Walmart nor Amazon is likely to leave India. It is the last, big, unconquered market in the world and the two biggest names in the retail world are not about to abandon their long-term plans because of a blip. However, there’s little doubt that the policy changes have seriously damaged them in the short term.

Both companies will find workarounds but their cost of operations will increase substantially because of the laws that seek to curb discounting, regulate seller relationships, ban private brands and impose other restrictions on their modus operandi.

The policies are clearly aimed at pacifying the small-trader lobby represented by the Confederation of All India Traders that for years has complained about the discounting practices of online retailers. Small traders are thought to be an important vote bank for the Bharatiya Janata Party. They were angered by the introduction of the goods and services tax in 2017 and the government decided it had to mollify them. Another big gainer supposedly is Mukesh Ambani’s Reliance Industries Ltd, which has grand plans to enter e-commerce.

Whether the policies are sound is another matter altogether. There’s a case to be made for restricting the power of internet platforms—the monopolistic power of the big internet companies in the US is a cautionary example. Policies will need to be formulated and updated in ways that take into consideration not only the interests of consumers but also of supply-side dominance and other forms of monopolistic behaviour.

However, rather than doing anything of this sort, India’s rash policy announcements are bound to damage investor outlook. They simply make a distinction between foreign and domestic businesses. Domestic retail firms are free to adopt all the practices that Flipkart and Amazon have been banned from. In fact, combined with the angel tax issue, data localization regulations and the ban on online sales of medicines, internet businesses and startups have in general suffered serious setbacks over the past two years. India’s ranking in the Ease of Doing Business index published by the World Bank jumped to 77 last year, a rise of 65 positions from 2014.

The reliability of the index as an actual indicator of doing business is debatable, but Prime Minister Narendra Modi has claimed this increase as a major success. The country’s internet businesses would disagree.

For too long, successive governments have adopted a wink-and-nudge approach to foreign investment in e-commerce. It is now time for a new, comprehensive policy that can promote the interests of consumers, encourage new businesses to come up and challenge incumbents, and attract investments. Political solutions will not accomplish this.

Also Read:

Walmart’s Flipkart asks India to postpone curbs to avoid customer disruption

Amazon, Walmart reel as Indian e-commerce norms plunge market into chaos

This article was first published on livemint.com