Control regulatory excesses in retail markets

How should the government balance the interests of retailers while protecting the interests of consumers? Fair legislation and transparent, market-based rules to drive higher investment and growth, better employment opportunities and higher trade tax collection would be the long-term answer.

Unfortunately, legislation in democracies is heavily influenced by political economy which dilutes technical common sense. Lawmakers choose to benefit one set of citizens rather than others. The political economy is ahead in defining the rules of e-commerce – the shiny new kid on the block in retail markets – which accounts for around seven percent of estimated retail turnover of Rs 65 trillion (2020) but is expected to grow at 2 times the average growth rate in retail.

Political economy was important when FDI in retail was liberalized in 2011-2013 during the last days of the UPA2 government led by Manmohan Singh. Despite fierce opposition from the BJP, the Communists, West Bengal and Tamil Nadu, the government liberalized the FDI regime allowing conditional foreign competition in the retail trade. This trend continued under the Narendra Modi government until 2019, benefiting consumers through lower choice and prices, workers through new urban jobs, and empowering small vendors who in association with e-commerce platforms, have become part of the formal sector.

Today, 100% FDI is allowed through the automatic lane for ‘one brand’ retailers (like IKEA) that also sell online, albeit with jumpers, like mandatory local buying or incremental exports equal to 30% of national sales.

The interests of existing, large, national, chain retailers or future promoters are protected. FDI above 51 percent in multi-brand brick-and-mortar retail is prohibited, thus positioning existing large national retailers as convenient partners for takeovers. One hundred percent automatic FDI in multi-brand marketplaces is permitted but hampered by the prohibition on the platform owning inventory or having a business interest in registered sellers in the electronic marketplace. None of these constraints apply to national electronic markets.

The ban on electronic commerce of stocks held for foreign owners is anti-consumer and anti-worker. It delays foreign competition, additional investment and employment. This generates a perverse incentive for foreign-owned electronic marketplaces to play with the system by gaining an indirect ‘business interest’ that is difficult to disentangle from registered sellers through layered shell structures, which are widely used to evade the system. tax internationally. Such porous regulatory provisions are generally ineffective – they only serve to keep well-known brands out but attract “shady” foreign business partners.

Regulatory “demons” continue to proliferate. The most recent proposed changes to the 2020 Ecommerce Rules – which were briefly available at the end of June 2021, for just 15 days, on the Ministry of Consumer Affairs website – offer some deprecated changes. Consider the provision imposing a fallback liability in the electronic marketplace for the wrongdoing 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 responsible for the misdeeds of anyone renting space inside the mall.

Second, requiring sellers in an electronic marketplace to declare the country of origin of goods is not exceptional. But surely, the electronic marketplace should not be responsible for the misrepresentation of the seller.

Third, ordering the electronic marketplace to promote Indian substitutes for the foreign products listed on its website ironically requires that the electronic marketplace play a more active role – bordering on discrimination between a class of sellers – what they are expressly forbidden to do.

More importantly, these adjustments, presumably to protect the interests of domestic online retailers, are unlikely to favor “Atmanirbhar Bharat”. In business, international competitiveness is the only path to self-confidence. Admittedly, such “additional administrative burdens” are unlikely to distract foreign investors from India’s large e-commerce market. But the argument for protecting “infant industry” must be considered alongside our long history of creating uncompetitive business entities and ultimately harming the interests of consumers and the working class.

Despite the hubbub around e-commerce, mostly from investors looking for inflated returns, over 90% of India’s retail business remains unorganized and physically structured. Compare that with a 20 percent formalization share in China, 40 percent in Thailand, 55 percent in Malaysia, and 85 percent in the United States.

India has between seven and 11 retail stores per 1,000 population, most with less than 500 square feet of floor space (ICRIER 2007). Consolidation and formalization are therefore inevitable for productivity gains. Much will depend on the rate and pattern of distribution of future economic growth. Disposable income must increase, especially in the bottom three quintiles, to generate demand for diversified retail markets. Currently, 70 percent of retail demand is for groceries only.

Providing incentives such as the upward revision (June 2020) of income and investment criteria to reap the benefits of MSMEs is a good example of benefiting 23 million trade-related MSMEs. Innovative retail formalization mechanisms can promote inclusive growth and decent employment. One-third of formal retail jobs are for those with a degree or more. Formalization also improves the collection of trade taxes and provides a better shopping experience for customers. Sufficient competition and higher productivity can also lower prices – if the government reduces political economy and geopolitical concerns in formulating economic policy.

About 60 million households make their livelihoods as owners or workers in the retail trade, including 40 million in 14 million licensed retailers, 10 million urban street vendors and another eight million small village shops, serving our six lakh villages. This is almost a quarter of the total number of households and close to the number of farm households, which feature prominently in the government’s political economy calculations.

Constructively thinking about a contextual business strategy for rapid formalization of bottom-stack retailers could dramatically improve political capital, far more than protecting comfortable trading territories for the big boys of retail.

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