Taming regulatory excess in retail markets

How should government balance the interests of retail sellers whilst protecting the interests of consumers? Even handed legislation and transparent, market-based rules to kindle higher investment and growth, better employment opportunities and higher tax collection from trade would be the long-winded answer.

Sadly, legislation, in democracies, is strongly influenced by political economy which dilutes technical good sense. Legislators choose to benefit a set of citizens versus others. Political economy is upfront in defining the rules for e-commerce — the bright new kid in retail markets — which accounts for around seven per cent of the estimated retail turnover of Rs 65 trillion (2020) but is expected to grow at 2X the average growth rate in retail.

Political economy loomed large when FDI in retail was being liberalised in 2011-2013 during the waning days of the Manmohan Singh led UPA2 government. Despite bitter opposition from the BJP, the Communists, West Bengal and Tamil Nadu, the government liberalised the FDI regime allowing conditional foreign competition in retail. This trend continued under the Narendra Modi government till 2019, benefiting consumers through choice and lower prices, workers via new urban jobs and empowering small suppliers, who, by association with e-commerce platforms, became part of the formal sector.

Today 100 per cent FDI is permitted through the automatic route for “single brand” retailers (like IKEA) who also sell online, albeit with riders, like compulsory local purchase or incremental exports equal to 30 per cent of domestic sales.

The interests of existing, big, domestic, chain retailers or future promoters are protected. FDI beyond 51 per cent, in bricks and mortar multi-brand retail is banned, thereby positioning existing large domestic retailers as convenient partners for buy-outs. One hundred per cent automatic FDI in multi-brand e-commerce marketplaces is allowed but hobbled by the platform being banned from owning any inventory or having any commercial interest in the sellers registered on the e-marketplace. No such constraints apply to domestically owned e-marketplaces.

The ban on inventory held e-commerce for foreign owners is anti-consumer and anti-worker. It retards foreign competition, incremental investments and employment. It generates a perverse incentive for foreign owned e-marketplaces to game the system by acquiring difficult to unravel, indirect “commercial interest” in registered sellers via layered shell company structures, which are widely used for evading tax internationally. Such porous regulatory provisions are generally ineffective — serving only to keep recognised brands out but attracting “shady” foreign business partners.

Regulatory “demons” continue to proliferate. The most recent proposed amendments to the E-Commerce Rules 2020 — which were briefly available in end June 2021, for just 15 days, on the consumer affairs ministry’s website — propose some inadvisable changes. Consider the provision imposing a fallback liability on the e-marketplace for the misdeeds of a registered seller, not limited to what is contractually agreed between the two. Applied to the physical world the owner of a mall would become liable for the misdeeds of anyone renting space inside the mall.

Second, requiring sellers on an e-marketplace to declare the originating country of the goods is unexceptional. But surely, the e-marketplace should not be liable for misdeclarations by the seller.

Third, directing that the e-marketplace promote Indian substitutes for foreign goods listed on its website, ironically, requires the e-marketplace to play a more active role — bordering on discrimination across a class of sellers — which they are expressly forbidden to do.

More importantly, these tweaks, presumably for protecting the interests of domestic e-retailers, are unlikely to further “Atmanirbhar Bharat”. In commerce, international competitiveness is the only pathway to self-confidence. Admittedly, such “additional clerical burdens” are unlikely to turn foreign investors away from the great Indian e-commerce marketplace. But the argument for “nascent industry” protection must be considered alongside our long history of breeding uncompetitive business entities and hurting consumer and working-class interest eventually.

Despite the brouhaha around e-commerce, mostly by investors looking for exaggerated returns, more than 90 per cent of Indian retail remains unorganised and physical in structure. Compare this with a formalisation share of 20 per cent in China, 40 per cent in Thailand, 55 per cent in Malaysia and 85 per cent in the US.

India has between seven and 11 retail shops per 1,000 population, most with less than 500 square feet of covered area (ICRIER 2007). Consolidation and formalisation are consequently inevitable for productivity gains. Much will depend on the rate and distributional structure of future economic growth. Disposable incomes must increase, especially in the bottom three quintiles, to generate the demand for diversified retail markets. Presently, 70 per cent of the retail demand is for groceries alone.

Providing incentives like the upward revision (June 2020) in the revenue and investment criteria for qualifying for MSME benefits, is a good example of benefiting 23 million trade related MSMEs. Innovative facilities for formalising retail can enhance shared growth and decent employment. One third of the jobs in formalised retail are for diploma holders or higher. Formalisation also enhances tax collections from trade and provides a better shopping experience for customers. Sufficient competition and higher productivity can also lower prices — if the government dials down political economy and geopolitical concerns in economic policy formulation.

Around 60 million households derive sustenance as owners or workers in retail, including 40 million in 14 million licensed retailers, 10 million urban street vendors and another eight million small village shops, catering to our six lakh villages. This is nearly one fourth of the total households and close to the number of farming households, which figure strongly in government’s political economy calculations.

Thinking constructively about contextual business strategy for rapid formalisation of retailers at the bottom of the pile, could significantly enhance political capital, far more than safeguarding cushy business turfs for the big boys of retail.