Macroeconomics

India’s national policy framework on e-commerce: Issues and concerns

  • Blog Post Date 12 November, 2018
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Rahul Choudhury

National University of Singapore

isasrnc@nus.edu.sg

In July 2018, India released a draft national policy framework on e-commerce among its stakeholders. The ensuing debate led to the government announcing a revised draft policy. In this post, Rahul Choudhury examines some of the major provisions of the policy in light of the country’s issues and concerns with regard to e-commerce, and suggests the way forward.

 

On 30 July 2018, India released a draft national policy framework on e-commerce among its stakeholders. It talks about a whole range of issues in e-commerce including data localisation, level playing field for the small players, prohibiting deep discounts, and consumer protection. It started a debate among its stakeholders and faced protest from various agencies. Government departments who were proposed to implement some of the provisions of the policy also raised concern and the Prime Minister’s Office had to intervene. Finally, the government announced the revision of the draft policy within 15 days of its circulation. This article tries to gauge the necessities to formulate the policy in the context of current situation of the industry. It also examines some of the major provisions of the policy and suggests the way forward. 

Background

India is one of the biggest and fast growing e-commerce markets in the world. The total size of the industry was reported to be US$14.5 billion in 2016 and expected to grow to US$80 billion by 2020 (Choudhury 2018). Indian e-commerce sector registered a growth rate of 24.08% and total sales volume of US$ 20.05 million during 2017. The share of e-commerce sector was 4.2% during 2017 out of the total retail trade in India and it is expected to touch 5% by 2020. This promising performance has attracted investment from various quarters. Almost all the major domestic corporate giants like Tata, Reliance, and Birla have forayed into this business. World’s biggest online retailers like Amazon and Alibaba have also invested to get a share of the pie. It is definitely the size and growth expectation that led the world’s biggest retailer Walmart to make its biggest acquisition in India through Flipkart. Walmart’s acquisition of 77% stake in the Indian e-commerce firm Flipkart with US$16 billion is the world’s biggest acquisition of an e-commerce firm so far. 

The remarkable growth rate of this sector is fuelled by growing mobile subscribers, high rate of internet penetration, growing usage of credit cards, and India’s large young population. Government initiatives of encouraging digital payments and developing infrastructure to support the digital economy through various schemes are also attributed to this growth. 

All these developments discussed above took place in a milieu where there is no clarity about the policy that governs the sector. Even after touching the mark of US$ 20 million in sales, and receiving world’s biggest investment of the sector, India still has to finalise a comprehensive policy for this sector. Currently, this sector is regulated by various individual policies like the Information Technology Act, 2000, Competition Act, 2002, Consolidated Foreign Direct Investment (FDI) policy, etc. India’s first attempt to formulate a specific policy for the e-commerce sector can be traced back to 2014 when Department of Industrial Policy and Promotion (DIPP) issued a discussion paper asking feedback from the stakeholders whether to allow FDI in retail e-commerce sector or not. However, the decision on the same has not been made public yet. As the feedback was asked only regarding the FDI in the sector, it was not an inclusive attempt to frame a policy for governing the entire sector. Again by issuing a press note in 2016, DIPP tried to bring some clarification about the sector (DIPP, 2016). Since then, nothing happened in the policy arena of this sector until April 2018 when the government decided to set up a think tank to prepare a national framework of e-commerce. 

What led India to prepare a national framework of e-commerce?

Along with the promising growth, Indian e-commerce sector is also facing a number of challenges. Indian e-commerce firms allegedly violated existing competition policy, FDI norms, the Foreign Exchange Management Act (FEMA), taxation rules etc. (Choudhury 2014). A series of cases are registered against most of the major players of this sector. The Delhi High Court in November 2015 ordered the government to investigate  21 e-commerce websites for possible violations of FDI laws. In 2012, Enforcement Directorate investigated a similar case against Flipkart. Similar cases were also registered against Amazon India in 2014 (Choudhury 2014). Cases were lodged in Competition Commission of India (CCI) against the firms for alleged “abuse of its dominance” by indulging in unfair and discriminatory practices. Complaints were made by the state government of Karnataka against Indian e-commerce firms for allegedly evading Value Added Tax (VAT) in 2014 (Choudhury 2014). Two retail trade bodies had also alleged that the government’s existing retail policy does not allow e-commerce firms to directly sell to customers, but in the garb of the marketplace model these firms are directly selling to customers, thus violating rules (Mishra 2018).

Apart from these domestic challenges, there are a number of challenges that the Indian e-commerce sector faces internationally. During the recent Ministerial Meeting of World Trade Organization (WTO) held in December 2017, Indian authorities found themselves unprepared to negotiate rules facilitating cross-border e-commerce. The major concern for India arose when 71 countries led by US, China, and Japan issued a joint statement, saying that they would launch an exploratory workanalysing existing FDI regulations to have an in-depth understanding for the future WTO negotiations on trade-related aspects of e-commerce. India maintained that it was not ready for any such multilateral rules, as the e-commerce space in the country was still evolving; the difference on key issues within various wings of the government, such as data localisation, and source code were the key reasons for the reluctance (Mishra 2018).


E-commerce is also discussed specifically in other multilateral forums where India is a party, like Regional Comprehensive Economic Partnership (RCEP), and the Comprehensive Economic Cooperation Agreement (CECA). The CEPA between India and Singapore came into force in 2005 and is undergoing its second review. It is expected to assert a separate chapter on e-commerce in the agreement. 

Realising the issues from domestic and international perspective, India addressed the concern by setting up a think-tank in April 2018, under the chairmanship of Mr. Suresh Prabhu, Minister of Commerce and Industry,  to formulate a comprehensive national framework for e-commerce sector. The think-tank circulated its first draft report to its stakeholders on 30 July 2018. 

What is in the policy?

The draft report was prepared with the objective of enabling the stakeholders to tap the opportunities that would arise from progressive digitalisation of the domestic and global economy. The draft report seeks to identify strategies for strengthening the regulatory regime – for protecting the consumer, and facilitating ‘Digital India’1 campaign through e-commerce. The draft also proposes various implementing agencies for the provisions laid down in it. It points out the following provisions:2 

  • E-commerce companies should stop offering discounts within two years.
  • FDI up to 49% will be allowed in the inventory form of e-commerce.
  • An independent regulator will be set up to deal will various issues related to e-commerce firms.
  • Provisions of the CCI will be amended to investigate mergers and acquisitions in the sector.
  • Bulk purchase of branded goods between the related entities will be prohibited.
  • All data collected by e-commerce firms, social media websites’ search engines, and the internet of things will be mandatorily stored in India. Sri Krishna commission recommendation on data localisation will be implemented. 

It can be interpreted from the points mentioned above that Indian policymakers have studied the sector well, and have given a serious thought keeping all the strengths of the economy in mind to develop the growing sector. With its huge population covered under mobile and internet network, India offers a huge market to e-commerce firms. The young population with technological literacy, growing urbanisation, increasing per capita income, expanding financial inclusion, and a growing number of credit card users further adds to the potential of e-commerce firms. All these provide a huge opportunity for the Indian firms to lead the game. But that is difficult to materialise unless they are supported by the government. And a policy is a wonderful instrument to support. 

Prohibiting bulk purchase is a much-needed step. Big firms like Amazon, Flipkart have been taking advantage of the loophole in the existing policy for a long time. Flipkart’s arrangement through WS retail, and Amazon’s activities with Cloudtail have been reported a long time back (Choudhury 2014). It is because of these practices government had to clarify that total sale through a single vendor cannot exceed 25% of the total sale of an e-commerce firm (DIPP, 2016). Even after the implementation of that rule Amazon found a loophole, and set up another company called Appario Retail to sell merchandise on its website. Appario Retail registered a total income of Rs. 7.59 billion in less than a year of its operation.

In the same line as prohibiting bulk purchase, it is also important to regulate the deep discounts offered by these online giants. The discounts offered by e-commerce firms have heavily impacted the Kirana and mom and pop stores. 

With its big market size and large population, India generates a huge volume of data every day. Many of the data are of a crucial nature. Illegal use of the data of Indian citizens can cost India a lot as it is experienced in the case of Cambridge Analytica. Thus the decision of mandatorily storing data locally is praiseworthy. India has many favourable factors to dictate the game in its own terms. A large and growing market along with many other factors can help India to negotiate with multinational enterprises to store data in India. Companies like Xiaomi have already taken a step in this regard by announcing to shift all of their Indian users’ data to local servers in India. 

Voices against the policy

The proposed draft policy raised a few concerns among the stakeholders. One such concern is from the Confederation of All India Traders (CAIT) who protested against allowing 49% foreign stake in the inventory model of e-commerce firms. Traders’ body has accused e-commerce firms of violating norms by offering deep discounts and directly selling goods to customers. The mandatory provision of storing data in India is opposed by companies like Amazon and Facebook. 

Another objection to the draft policy was raised by government departments who were designated to implement various provisions and who faced the fear of encroachment of their domain. This led to the Prime Minister’s Office holding a discussion with officers of different departments. Addressing the concerns raised by stakeholders government announced a revised draft policy on 11 August 2018. 

The way forward

E-commerce straddles various issues like international trade, domestic trade, competition policy, consumer protection, information technology etc. As a growing sector with huge interest from both domestic and international players it becomes pertinent to regulate it keeping in mind the interest of both entrepreneurs and consumers. A conducive environment and a level playing field should be encouraged. Policymakers should also be mindful of shaping a vibrant domestic industry. A comprehensive policy is of utmost importance to reflect India’s position in both domestic and international or multilateral forums. 

Notes:

  1. Digital India is a programme to transform India into a knowledge economy.It aims to push digitisation and connectivity as a vehicle for increased economic growth.
  2. Compiled from various media reports. 

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