Union Commerce and industry minister Piyush Goyal has stirred up the pot by letting go a broadside against Amazon and other ecommerce players. Attacking these e-retailers for ‘predatory pricing’, Goyal alleged they were slowly killing the vast network of small, mom-and-pop shops through unfair competition. He also suggested Amazon was passing off fund infusions to cover Rs 6,000 crore of losses by disguising them as investments.
“If you make Rs 6,000 crore loss in one year, does it not smell of predatory pricing?” he asked, claiming many e-tailers were violating foreign direct invest (FDI) laws.
It is ironical the minister for commerce and industry should be complaining of the bad ways of the big e-tailers! Traders through their apex body – the Confederation of All India Traders (CAIT) – have been begging the government for years to take action against predatory pricing. To no avail!
It is ironical that Goyal was speaking at an event where a think tank, Pahle Foundation, released a report that showed ecommerce was still small play in India, and that in fact retailers had benefited hugely from combining brick-and-mortar stores with ecommerce sales.
As per the report, while e-commerce is indeed growing at a fast pace, it comprised only 7.8% of total retail sales in 2022. The report estimated that there were 1.76 million online vendors, who had added 16 million jobs, including 3.5 million for women. It report also said 60% of small city vendors had reported increased sales since they had started selling online.
Loopholes in the law
Coming to ‘predatory pricing’… Well, that’s a real problem! And it is as old as the hills. And the government has done nothing about it.
For years, small retailers have been complaining ecommerce operatives like Amazon and Walmart-acquired Flipkart have been pricing goods below cost of production as a strategy to kill competition. While they incur a loss in the short term,once competitors have shut shop, the big retailers acquire a monopoly, and fix prices to the detriment of millions of consumers.
Free competition is the life blood of a market economy. Section 4 of the Competition Act, 2002 forbids ‘unfair or discriminatory’ pricing, by the abuse of a ‘dominant position’. To ensure fair competition and to weed out monopolies and trusts, the Act has set up a regulator – the Competition Commission of India (CCI) mandated to act against monopolies.
However, there is a serious anomaly in the Competition Act. A commercial entity can be hauled up for ‘predatory pricing’ only if has the advantage of “dominant position in the relevant market”. Players like Amazon, and app-based taxi services like Ola and Uber began being hauled up when they offered huge discounts.
But, the Competition Commission took the stand that mere strong financials of a company or the offer of deep discounts do not prove unfair competition. Most of these are new entrants, and they do not have a proven ‘dominant position’ in the market they operate in. Adjudication against these companies, therefore, failed on account of the restrictive interpretation of Section 4 of the Competition Act.
More recently, in the Vaibhav Mishra v. Sppin India case, also known as the ‘Shopee case’, the Competition Commission rejected the claim that the online marketplace ‘Shopee’ engaged in predatory pricing, ruling that the company doesn’t possess dominance in the online marketplace, and so can’t be penalized.
Turning a blind eye
Needless to say, the complaints of small traders continued. Then came the takeover of Flipkart by US giant Walmart in 2018, which created panic. To address the issues, a new FDI policy for ecommerce was brought in via a press note from the Department for Promotion of Industry and internal Trade (DPIIT). The fresh rules drew a clear line between foreign ecommerce entities investing in setting up an online marketplace, where vendors sold their goods on an equal footing, and foreign investors building inventories and becoming direct sellers to consumers. The policy prohibits FDI in e-commerce where the platform goes beyond being a facilitator, and becomes a seller either directly or through subsidiaries.
These rules should have plugged the holes, but the subterfuge has continued. There are favoured vendors, and there are vendors who are nothing but disguised subsidiaries of the Amazons, Flipkarts and Myntras. Piyush Goyal’s outburst wouldn’t have come had the FDI policy for ecommerce worked. Maybe those entrusted with policing are looking the other way! The public whipping, mainly aimed at Amazon, is uncharacteristic of a government committed to bringing fresh investments. Amazon’s CEO Andy Jassy promised not long ago in June $26 billion by 2030. Maybe elections round the corner in 4 states has prompted a populist appeal to the large vote base of small traders.
India’s retail market is huge. Some say it is worth $900 billion with an estimated 12 million small stores. The answer to how ecommerce can be freed of monopolistic control ultimately lies with the government, not Amazon. It is up to the former to amend the Competition Act appropriately to give it more teeth. And it is the government that must enforce the FDI rules that prohibit foreign ecommerce giants to operate as sellers.