View: Government’s e-commerce rules distort business, don’t help Indian entrepreneurship

It’s possible to be deeply worried about two foreign-owned companies catering to three-fourths of India’s fast-growing online retail market and still be deeply critical of GoI’s recent reinterpretation of ecommerce rules.

Our critique will survive even if Amazon India and Walmart-owned Flipkart somehow tailor their business models by the February deadline, or manage to persuade GoI to defer the date when reinterpreted rules bite in.

Here are six reasons why:

Mature Economies Don’t Abruptly Change Rules:It’s true that some bits of the late December rules were not new. But other bits were new, or effectively new. These include prohibition of a marketplace owner’s equity participation in vendors that sell on that marketplace as well as the de facto killing of private labels. A mere months after the Competition Commission of India cleared Walmart’s acquisition of Flipkart and GoI made a windfall taxing that deal, it’s a mockery of good policymaking to change the rules of the game. If an Indian conglomerate’s huge foreign investment was hit with similar government fiat abroad, our firebrand economic nationalists would have been ranting about ‘colonial exploitation’. India is set to be the world’s fifth-largest economy (in market exchange rate terms) this year. These rules are terrible advertisement for the policy maturity of the world’s fastest-growing large economy.

Micro Interventions Can Affect Entrepreneurs in All Sectors: GoI’s reinterpreted rules ban business decisions like one ecommerce marketplace entering into an exclusive selling arrangement with one product manufacturer. It also puts restrictions on which vendor can buy how much from which company or sell how much on a marketplace. GoI’s argument is that it’s ensuring online marketplaces stay ‘pure’ marketplaces and not a de facto ‘supply and sale’ game played by the likes of Walmart and Amazon.

But that’s far less consequential for India’s economic future than the fact that GoI has showed it’s ready to deploy socialism-type interference with business freedom. Businessmen celebrating this interference today, or businessmen in other sectors, should understand tomorrow it could be them

A Seat in the Lobby

All policymaking is subject to lobbying. If lobbyists see that GoI has restricted basic business freedom in one sector, pressure for similar action in other sectors will be intense whenever one set of companies or one very big company faces adverse conditions.

Only Giant Domestic Entities, Not Smaller Domestic Ventures, Will Benefit: It’s been argued that reinterpreted rules will help existing, Indian-owned ecommerce ventures and brighten the chances of future Indian startups.

But Walmart and Amazon losing a share of the ecommerce pie doesn’t automatically mean smaller domestic ecommerce outfits will gain. Indian ecommerce is still at a stage where customers are principally attracted by deep discounts.

Ecommerce is only 3% of India’s retail business. That’s why online retail needs a discount-heavy pricing strategy. All entrepreneurs, whether Jeff Bezos or my cousin dreaming of his ecommerce business, understand this. They also know deep discounting requires deep pockets. And who can afford deep discounts? Only big players.

Therefore, if Walmart and Amazon vacate some parts of the online marketplace, only domestic players with very deep pockets will benefit.

This raises a serious question whether reinterpreted rules will actually benefit all Indian entrepreneurs.

Therefore, This is the Wrong Way to Encourage Domestic Entrepreneurship 1.0: Replacing deep-pocketed foreign players who dominate the online market with deep-pocketed domestic players who will dominate the market isn’t going to encourage Indian entrepreneurs.

What would have really helped Indian startups in general are rules that mandate all capital that’s burnt for deep discounting in online sales be raised in India, and not brought in from abroad.

Capital dumping from abroad is the blunt instrument used by giant foreign entities to dominate a growing market like India’s. Such a capital-raising rule would have kept Amazon’s and Walmart’s basic business freedom intact. It would have energised domestic funds as well as domestic capital markets. And that, in turn, would have given smaller startups better access to capital. And deep-pocketed domestic players would have had no problems either.

Therefore, This is the Wrong Way to Encourage Domestic Entrepreneurship 2.0: The other business non-distortionary help that Indian entrepreneurs need is a rule which mandates that startups can issue shares with differential voting rights. That is, founders can hold shares that will carry more voting rights than shares held by, say, a foreign investor. So, even if foreign investors or any class of big investors put in more capital than founders, the latter still retain control.

Share Only the Spoils
Technology venture founders in both the US and China have used the provision of shares with differential voting rights to retain control. Following from the fifth point, and in conclusion, note that the draft ecommerce policy released earlier had suggested shares with differential voting rights. That draft also had plenty of pettifogging socialism-type rules. It’s under revision.