The changes in e-commerce rules have impacted Amazon and Walmart severely. But the government must also address allegations of protectionism and policy uncertainty.

• After the new e-commerce rules came into effect on February 1, Amazon and Flipkart have pulled down thousands of products within a few days.
• Government sources allege that both companies were flouting rules, which compelled the government to make these changes. 
• The rules will severely impact the business operations of Amazon and Walmart in the short term.
• Critics feel that the Indian government has not thought out the changes well, and have accused  it of protectionism

Just over a week has passed since the introduction of the new e-commerce rules in India, which have severely impacted the operations of Flipkart and Amazon in the country.

Industry experts are watching the proceedings intently and analyzing the potential impact of the rules on these two players. Flipkart and Amazon officials have alleged that the rules are discriminatory and have not taken their perspective into account.

The changes have been viewed as a largely populist gambit by the Modi government to address the concerns of angry traders before the elections. These traders have accused e-commerce firms of adopting unfair business practices like deep discounting and exclusive deals, which were impacting the sustainability of their businesses. In addition, since the changes impact e-commerce firms with FDI in particular, the government also faces accusations of semi-protectionism.

Morgan Stanley has released a report, citing the possibility of Walmart exiting India, just as Amazon had left China in 2017. The report states that the new rules have increased business costs and long-term uncertainty. Flipkart’s losses could increase by 20-25% due to the new rules.

However, Flipkart has denied this claim, with its CEO Kalyan Krishnamurthy commenting, “The report couldn’t be further than the truth. Walmart remains extremely confident about the potential of the Indian market and in Flipkart’s ability to lead the e-commerce space.”

JUSTICE HAS BEEN SERVED

Government sources have defended the changes and sought to clarify that the changes have not been done in response to trader complaints alone. In turn, they have charged that Flipkart and Amazon were bypassing the rules by managing inventory-based operations through a network of controlled sellers. A government source has commented to TOI, “Flipkart and Amazon were influencing prices of goods on their platforms through various means, including direct price discounts, covering marketing expenses (marketing campaigns, EMIs, exchange offers) and extending concessional logistics services (packaging, courier, returns), e-wallet cashbacks.”

The source added that both companies used their intermediaries and group entities to divide the discounts and spread their losses, which ultimately impacted the domestic retail sector. For instance, it is alleged that Amazon Wholesale India used to purchase branded goods in bulk and sell them to entities like Cloudtail and Rocket Kommerce at a discount, thereby showing losses on its books. Amazon Seller Services would then pick the tab for marketing, zero-cost EMIs, etc. and handle logistics activities at a discount. Even Amazon Pay was offering cashbacks. Cloudtail accounted for upto 40% of Amazon’s sales during some months.

In a similar fashion, Flipkart also bought in bulk and sold to seller entities linked to it at a discount. Ekart Logistics took charge of packaging and shipment, and PhonePe offered cashbacks.

BUT IT WAS SERVED COLD!

Amazon and Flipkart officials have complained that the policy changes were unilateral and their perspective was not considered. After the announcement on December 29, they requested the government for an extension beyond February 1. They had at least Rs 2,50o crore worth of products each to liquidate before the rules took effect.

That did not happen, and both companies have been compelled to pull down thousands of products from their online marketplaces. Also, the Nasdaq-listed Amazon and the NYSE-listed Walmart lost an aggregate of US$ 50 billion in market cap after the policy came into effect.

PwC has estimated that the changed rules could lead to e-commerce sales falling by around US$ 46 billion by 2022. Within just a few days, at least a third of the sales volume of these companies simply vanished. The Morgan Stanley report cited earlier estimates that losses for Amazon in India could double in three years, while Walmart could increase its losses by US$ 280 million by the end of the year.

The other allegation is of unfairly favouring domestic businesses. This is directed in particular at Reliance, which announced its e-commerce venture recently.

In addition, Amazon’s investment in food retail seems to be going down into the abyss with the recent changes in e-commerce rules. These rules will eventually imply that Amazon’s food retail business ARIPL will not be able to sell on Amazon.in from February 1, 2019.

MANAGING THE UNINTENDED CONSEQUENCES

The changes in rules have a huge short-term impact on Amazon and Walmart in the short term, since their business models were well developed before these changes were introduced. On the other hand, Walmart’s exit so soon may be an outlandish notion, both due to the potential of the Indian market and because Flipkart would definitely be undervalued at this juncture.

Both companies need to answer on allegations of unethical business practices. But the sudden changes in the rules do create a negative perception on India’s policy environment.

Kartik Hosanagar, a professor of technology and digital business at Wharton School commented, “The new regulations and the timing certainly hurt Amazon and Flipkart and the broader sentiment of global investors… Overall, I am afraid that this was not well implemented. It hurts the two large players and presents government interference and regulation as a potential risk for global investors.”

The government needs to proactively address the allegations of protectionism and policy uncertainty, as this could negatively impact India’s image as an investment destination in the coming years. It will make potential investors more wary of the policy environment and reciprocal action cannot be entirely ruled out, in particular by the US.