PUBLISHED:22:18 GMT, 3 October 2013| UPDATED:22:18 GMT, 3 October 2013
Adam Smith once wrote that “to widen the market and to narrow the competition is always the interest of the dealers,” and that therefore any proposal for a regulation or policy that flows within this order, must be “carefully examined”. Adam Smith lived in simpler times.
As the Prime Minister Manmohan Singh concludes his trip to Washington DC, there is palpable pressure on the Indian government to open up the e-commerce space to foreign players.
Large American e-commerce companies are already knocking on the door and reports suggest that one of the senior-most functionaries reporting to the Prime Minister has been given the task of shepherding this process and is seeking response from the DIPP on the underlying issues.
There are three popular narratives on the opening up of the Indian e-commerce sector to FDI and all of them are somewhat simplified, facetious and misleading. One perspective is that the opening up of the sector will be an Indian payback, a veritable payout, for US support in the civil nuclear mainstreaming of India.
Another is that delay in allowing FDI in e-commerce is part of the policy clutter created by this government, an unintended situation, to which the only suitable response is unencumbered liberalisation.
And the third is that FDI in online space is a matter of national priority, and sovereignty over the e-commerce space must not be ceded to multi-nationals.
The narrative on paying back the Americans is easily refuted. India must be sure enough to bargain for only what is in consonance with its core self-interests. Surely, stable and resilient growth of domestic manufacturing and industry is a core interest.
India is as at a crossroads. Policy decisions taken now are likely to determine whether the country is able to harness the transformative power of SME’s using the access and reach of e-commerce, or whether a haphazard and hurried policy framework is going to hinder the organic growth for the largest employer in the country.
The narrative on the policy clutter can be cross-examined through the growth story of the Chinese e-commerce giant, the Alibaba Group. Alibaba was established in China in 1999, initially funded through a Venture Capital infusion of $5 million by Goldman Sachs.
Prior to China’s WTO ascension, FDI in the sector was not allowed and even now, a local partner is a prerequisite to entering the e-commerce space. However, this has not limited Alibaba’s growth, which has been predicated on a larger state-run economic strategy centred on the SME sector and domestic industrial competitiveness.
China has over 40 million SMEs, many of which are sellers and buyers on the Alibaba platform. The company’s innovative products have created shared value, supporting the SME ecosystem. Through its finance arm, the company has deployed loans to over 10 million Chinese SMEs, therefore facilitating core policy objectives of the Chinese state such as financial inclusion and timely credit provision.
In all of this, of course, the consumer benefits, with lower transaction costs both in terms of average time spent in sourcing products and cost competitiveness. Sales through Alibaba’s online marketplace are expected to surpass those of the total e-commerce market in the United States by the end of the year. Last year, two of its portals handled around $170 billion in sales.
Alibaba’s much publicised and imminent IPO is now likely to be in New York. The company is likely to be valued at around $70 billion. This is significant value creation given its modest beginnings – and indeed value creation must be the strategic objective of any enabling industrial policy; a lesson for India.
In the outlined context, the third narrative on sovereignty over the e-commerce space also appears to be a conflation of hazy opinions. There is no doubt that as India integrates into the global economy with its incumbent need for long term capital formation, opening up various growth sectors to FDI is not an inevitable option.
This does not change the fact that there are a number of technical operational issues that require careful examination, not just by the bureaucrats at DIPP, but also by the legal fraternity, the tax collector, SME sector stakeholders and representatives from allied sectors including telecommunications and banking.
Indeed, an inclusive consultative process is an unfulfilled prerequisite. This must be steered by organisations such as the Competition Commission of India, a body which is supposed to function on a proactive mandate in order to obviate the need for a convoluted or retrospective regulatory ring-fence.
India represents a nascent e-commerce market, which is certain to grow exponentially as internet penetration rates improve and consumption patterns evolve. Estimated revenues from online retailing in India are expected to be at $15 billion by 2015 and $125-160 billion by 2025.
While many home-grown Alibabas can be created, in the absence of a robust legal framework, particularly around warranty, fraud and data protection issues, the consumer, is left vulnerable to the metaphorical ’40 thieves’ as the industry expands.
The IT Act is certainly insufficient and clarifications are required in the Competition Act, on among other things, unfair trade practices or restrictive trade practices, before the FDI question is resolved.
To sequence Indian priorities on the FDI question is fairly simple. Consumer-centrism is paramount. Competitive SME sector growth, which will lead to job creation as well as value addition, is a strategic economic priority, which in turn can be aided by a strong e-commerce industry as has been witnessed in China. While e-commerce must eventually resemble a highway without speed limits, the lanes leading up to the highway must be strengthened to allow for unfettered access.
The writer is senior fellow, Observor Research Foundation