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