This retail outlet sells a lot of products from all sorts of producers. The shopkeeper also buys stuff in a wholesale market and packages it neatly into smaller quantities, making it easier for buyers to shop. It sells its own-label goods a bit cheaper than the branded substitutes on offer. It also showcases its own brand’s products prominently to attract customer attention.
Should we make it illegal for the shopkeeper to showcase her own products over the other brands and compel her to ensure a level-playing field for all brands in her shop? If she has invested heavily in her retail business, taking substantial risks in the process, doesn’t she have a right to strategically display products that make more profit for her? And even worse, if she wants to sell her own-label products, then should we ask her to open another shop exclusively for that purpose?
What seem like untenable rules for a traditional commerce format are what our proposed regulations expect e-commerce companies to abide by. If enacted into law, India’s e-commerce regulations would shift the burden of liability for the products sold on these platforms onto e-commerce companies, instead of sellers, and would come down heavily on promoting their own brands, among several other restrictions.
*This would in effect amount to, say, the Tata group not being able to sell or promote Tata salt, Tata tea or Croma products on its e-commerce platform when it enters the sector, even as it sells all other brands of salt, tea and electronic items through its website.
What if e-commerce majors tomorrow declare that instead of following such stringent regulations, they would rather sell only their own brands? Who would win—buyers, other sellers, or the e-commerce giants?
Yes, the scale and reach of a traditional high street shop or retail chain is much smaller than a large e-commerce company. No doubt, there need to be checks and balances on their power, so that their search engines are not manipulated and a customer has a fair way to complain.
But we must remember that the same firms also offer discounted prices to small sellers for their raw material and lower their cost of production. These platforms have increased the reach of small businesses nationwide and even helped them address export markets.
For customers, they have made product returns hassle-free and improved product quality and variety. They have revolutionized the country’s logistics industry and supply chains. Their contribution to employment generation is now significant. And, all in all, the lower prices that e-commerce companies offer is an indirect real income increase, especially for our relatively low-income households.
From Duopoly to Oligopoly
India’s e-commerce sector is set to expand into an oligopoly with the entry of Reliance, Tata and a revamped Snapdeal from a near-duopoly of Amazon and Walmart-owned Flipkart at present.
An oligopolistic market can indeed see its players join hands to form a cartel and act against consumer interests. There are oligopolies that exist in other industries; for example, cement, where producers have been punished by the Competition Commission for operating illegal cartels. But, at present, there is no evidence of such anti-competitive practices in the e-commerce sector.
What is the best way to ensure that e-commerce platforms work to the benefit of smaller sellers across India? Encourage market entry and ensure that there is no excessive regulation. More e-commerce companies entering the market should result in more choice for small sellers in terms of the platforms they want to list on, depending on the listing fees, commission and so on.
The e-commerce industry, however, would remain driven by economies of scale and the sector can never be expected to turn into a perfectly competitive market. It will remain a differentiated oligopoly.
A large number of businesses—small, medium or large—go bankrupt daily, and at the same time, new businesses emerge. At one time, the retail business used to be conducted only in a traditional format, and there was no way of knowing how many businesses were going bankrupt.
It had little visibility. Now, with e-commerce, it is the same process; not every business that lists itself online is successful, but failures are more visible and vocal now. The truth is that many of India’s small-business owners should be gainfully employed elsewhere; large numbers are into subsistence entrepreneurship because of a lack of jobs.
Coming back to our shopkeeper, she often has customers who ask for discounts on marked retail prices and bargain hard, while she also gets customers who reach straight for their choice, pick it up, pay the price, and leave without uttering a single word.
Effectively, different consumers pay her different prices for the same products based on their willingness and ability to pay. Nearly every traditional retail transaction involves bargaining and price negotiations, but e-commerce platforms cannot engage in such price discrimination.
Instead, they offer discounts for limited periods on specific goods for customers whose willingness and ability to buy is less, which works to the benefit of many budget-bound shoppers.
Way Foward
In sum, we should not place excessively stringent regulations on e-commerce companies, which would lower consumer welfare as well as the ability of small sellers to expand their market reach, and also stifle innovation by lowering the ability of newer e-commerce companies to take risks.
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Steve Ovett, the famous British middle-distance athlete, won the 800-metres gold medal at the Moscow Olympics of 1980. Just a few days later, he was about to win a 5,000-metres race at London’s Crystal Palace. Known for his burst of acceleration on the home stretch, he had supreme confidence in his ability to out-sprint rivals. With the final 100 metres remaining,
[wptelegram-join-channel link=”https://t.me/s/upsctree” text=”Join @upsctree on Telegram”]Ovett waved to the crowd and raised a hand in triumph. But he had celebrated a bit too early. At the finishing line, Ireland’s John Treacy edged past Ovett. For those few moments, Ovett had lost his sense of reality and ignored the possibility of a negative event.
This analogy works well for the India story and our policy failures , including during the ongoing covid pandemic. While we have never been as well prepared or had significant successes in terms of growth stability as Ovett did in his illustrious running career, we tend to celebrate too early. Indeed, we have done so many times before.
It is as if we’re convinced that India is destined for greater heights, come what may, and so we never run through the finish line. Do we and our policymakers suffer from a collective optimism bias, which, as the Nobel Prize winner Daniel Kahneman once wrote, “may well be the most significant of the cognitive biases”? The optimism bias arises from mistaken beliefs which form expectations that are better than the reality. It makes us underestimate chances of a negative outcome and ignore warnings repeatedly.
The Indian economy had a dream run for five years from 2003-04 to 2007-08, with an average annual growth rate of around 9%. Many believed that India was on its way to clocking consistent double-digit growth and comparisons with China were rife. It was conveniently overlooked that this output expansion had come mainly came from a few sectors: automobiles, telecom and business services.
Indians were made to believe that we could sprint without high-quality education, healthcare, infrastructure or banking sectors, which form the backbone of any stable economy. The plan was to build them as we went along, but then in the euphoria of short-term success, it got lost.
India’s exports of goods grew from $20 billion in 1990-91 to over $310 billion in 2019-20. Looking at these absolute figures it would seem as if India has arrived on the world stage. However, India’s share of global trade has moved up only marginally. Even now, the country accounts for less than 2% of the world’s goods exports.
More importantly, hidden behind this performance was the role played by one sector that should have never made it to India’s list of exports—refined petroleum. The share of refined petroleum exports in India’s goods exports increased from 1.4% in 1996-97 to over 18% in 2011-12.
An import-intensive sector with low labour intensity, exports of refined petroleum zoomed because of the then policy regime of a retail price ceiling on petroleum products in the domestic market. While we have done well in the export of services, our share is still less than 4% of world exports.
India seemed to emerge from the 2008 global financial crisis relatively unscathed. But, a temporary demand push had played a role in the revival—the incomes of many households, both rural and urban, had shot up. Fiscal stimulus to the rural economy and implementation of the Sixth Pay Commission scales had led to the salaries of around 20% of organized-sector employees jumping up. We celebrated, but once again, neither did we resolve the crisis brewing elsewhere in India’s banking sector, nor did we improve our capacity for healthcare or quality education.
Employment saw little economy-wide growth in our boom years. Manufacturing jobs, if anything, shrank. But we continued to celebrate. Youth flocked to low-productivity service-sector jobs, such as those in hotels and restaurants, security and other services. The dependence on such jobs on one hand and high-skilled services on the other was bound to make Indian society more unequal.
And then, there is agriculture, an elephant in the room. If and when farm-sector reforms get implemented, celebrations would once again be premature. The vast majority of India’s farmers have small plots of land, and though these farms are at least as productive as larger ones, net absolute incomes from small plots can only be meagre.
A further rise in farm productivity and consequent increase in supply, if not matched by a demand rise, especially with access to export markets, would result in downward pressure on market prices for farm produce and a further decline in the net incomes of small farmers.
We should learn from what John Treacy did right. He didn’t give up, and pushed for the finish line like it was his only chance at winning. Treacy had years of long-distance practice. The same goes for our economy. A long grind is required to build up its base before we can win and celebrate. And Ovett did not blame anyone for his loss. We play the blame game. Everyone else, right from China and the US to ‘greedy corporates’, seems to be responsible for our failures.
We have lowered absolute poverty levels and had technology-based successes like Aadhaar and digital access to public services. But there are no short cuts to good quality and adequate healthcare and education services. We must remain optimistic but stay firmly away from the optimism bias.
In the end, it is not about how we start, but how we finish. The disastrous second wave of covid and our inability to manage it is a ghastly reminder of this fact.