Traders have blamed e-commerce sites like Amazon & Flipkart for poor Diwali sales
File photo of packaging at an Amazon facility in Hyderabad | Bloomberg
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Diwali sales seem to have been better than expected, witnessing a growth of about 7-9 percent. Media reports suggest that while larger retailers did well, sales at small retail stores were relatively tepid. However, reports from the e-commerce world suggest that big companies like Amazon and Flipkart that offered large discounts did serious business.

One response to this from traders was to blame e-commerce companies for their poor sales, and a demand that the government prevent them from offering big discounts.

The e-commerce business is a very fast-growing sector of the Indian economy, witnessing growth of more than 30 percent per annum. However, at present its size of about US$24 billion, it is a small chunk of the total $672 billion retail industry in India. By 2021, its share is expected to reach about 7 per cent of the retail market.

 


Also read: This is why Modi govt wants to punish Amazon, Flipkart for deep discount sales


Reasons to avoid disruptive regulation

Even though there are elements of the e-commerce firm behaviour that should attract regulation, such as predatory pricing and favouring in-house firms, there are two reasons why disruptive regulation should not be done in the immediate future.

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The first is that the share of the e-commerce companies in the retail market in India is currently very small and they are not in a monopoly position. Cases against them at the Competition Commission have not succeeded on these grounds.

Today, consumers are benefitting hugely from online sales. While trader bodies worry that the prices being offered by online companies are predatory, the fact remains that at less than 3.5 per cent of the market share, online sales could only have attracted away a small part of the total retail sales this Diwali. It is far more likely that sales are down due to the slowdown in overall consumption.

This brings us to the second reason — as CSO National Accounts data shows, aggregate consumption in the economy has slowed down in recent quarters and we don’t fully know how much it revived during Diwali. We do not know the extent to which the shocks of demonetisation and GST were responsible for the slowdown. We do not understand the extent to which the NBFC crisis and the consequent tightness in consumer credit is responsible for the consumption slowdown. We have not yet been able to understand the extent to which rural-versus-urban stresses have caused consumption demand to slow down. This is not the time to give consumption demand another policy shock.

If demand has started recovering, regardless of whether growth is in large retail, in online Diwali sales, in fashion apparel or in mobile handsets, the government should be very careful before planning any steps that could disrupt it.


Also read: RSS affiliate, trade body want govt to act against Amazon & Flipkart, fear ‘black Diwali’


Benefits of e-commerce platforms

E-commerce platforms are marketplaces and not sellers themselves. They essentially connect buyers and sellers in an efficient way. Discounts or cashbacks on these platforms increase the sales of the retailers who sell on them.

For sellers, with millions of consumers buying products, there emerges a national market for products that could earlier only be sold locally. Small businesses across the country have benefited from online market platforms by becoming sellers on them.

For consumers, these platforms offer relative safety, instead of having to deal with unknown websites and possibly fraudulent fly-by-night operations with difficult or non-existent return policies.

Currently, this sector, with its high growth and even higher potential, is attracting both foreign and domestic capital. This benefits the consumer. Even without discounts, the access, the convenience and cost-reductions due to warehousing and scale are able to make shopping on these platforms attractive.

In tier-2 and tier-3 cities, where large brands may not be present in small retail stores, the platformes allow consumers greater access to products.


Also read: Why Modi govt’s Amazon-like e-marketplace venture is unable to attract buyers


Concerns

One concern arises with deep discounts related to in-house companies — those owned by the parent companies of the platform. AmazonBasics is one example.

Another similar concern is partnerships with brands. For example, OnePlus has a partnership with Amazon, which prevents the manufacturer from selling phones on other platforms, and prevents others selling the same product.

These concerns may be genuine, but today, e-commerce companies aren’t dominant enough in the retail sector for anti-competitive laws to apply.

Another concern is due to economies of scale and network effects. Both lead to market consolidation and monopolies. An e-commerce company’s marketplace is reliant on network effects and the company’s logistics rely on economies of scale. Both need to be dealt with carefully.

Once these companies grow and consolidate the market, it may then become difficult to make the market competitive again. These concerns are difficult to deal with, and there aren’t too many examples from around the world. Retail e-commerce sales in China amount to more than 35 per cent and Alibaba controls over 50 per cent of the market. Even then, new companies are constantly coming up in China.

Perhaps these effects aren’t strong enough to create monopolies. More research is required.

To conclude, at this point in time, the government should refrain from bringing any further restrictions on consumption, with the idea of protecting the economy in the long run. The economic situation is too bleak for any consumption shock.

There are several points in the draft policy on e-commerce that are related to easing of rules in the sector, such as FDI in inventory-based e-commerce brands. These points can be looked at separately, and perhaps, be brought in.


Also read: Amazon & Flipkart sales find success in rural India as e-commerce moves beyond urban areas


The author is an economist and a professor at the National Institute of Public Finance and Policy. Views are personal.

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9 Comments Share Your Views

9 COMMENTS

  1. The policies of Modi government have been anti-consumer. Every time RBI reduces interest rate, we lose interest income on our FDs. Last year,

  2. In my opinion govt. should consider themselves fortunate that the problem like PREDATORY PRICING, DEEP DISCOUNTS have came to their notice when the e-commerce sector which is helmed as the new way of marketing vaguely preffered by the millennials. That to at a stage when when e-commerce sites are not a monoply or at least have a dominant share in retail business.
    Thus coming with regulations for these sites on pricing will be a welcome step because if not it can have negative repercussions :
    1. When a monoply is created based on predatory pricing it is at the cost of other business.
    2. If any of these company become a monoply in the sector then it will develop as TOO BIG TO FAIL and any unforseen situation like their bankruptcy or other will have a adverse affect then.
    Hence, there is need to bring out of box solution on this issue after listening to all the stakeholders.

  3. I am not sure what “discount” means here.! E-commerce companies obviously have advantage in supply chain and they can easily discount over mrp by 50% or more.! This is not predatory pricing.!! It is reality and deal with it.

    Second point is also not correct about in house brand. Again because it is in house their cost of supply chain is low and they can price it better. What’s problem with that?

    And if flipkart thinks that they can offer better deal to oneplus etc then go ahead. Samsung mostly favors flipkart but nobody talks about that.

    Let market prevail and bania class should stop markets from setting correct price. It is monopoly of bania class that should be highlighted instead and dealt with

  4. Amazon and Flipkart have access to almost zero interest rate capital while Indian companies have capital cost of 10 to 12%. They are breaking all the rules and have zero regulation because of their lobbying in India. They are blood bathing the Indian retail market and soon they will be at dictating position in many sectors. At that time not only Indian economy but the end consumers will also be at their mercy. #eastindiacompany
    #slavery

  5. Ila mam i think your points are not valid. Because you are missing the main issue. The issue is predatory pricing and unethical discounts.
    In any competition there are some rules amazon & flipkart giving unethical discounts because of these discounts the sale of retail markets or offline markets goes down.
    We can’t wait that amazon & flipkart do monopoly in our markets.
    And if they are only 3.5% of market shares so i think we have to concerntrate on betterment of our 96.5% shareholders.

  6. Thanks to Flipkart i got ₹10k discount on Xbox one s. Long live free market capitalism. Consumer is king. Socialist modi murdabad. E commerce Zindabad

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