The ongoing battle of swadeshi and videshi lobbies in India’s ecommerce sector has taken an interesting turn with the regime change in the US. In the past few years, Jeff Bezos-owned Amazon and Walmart-owned Flipkart have had a tough time dealing with the country’s ecommerce FDI norms, which have been changed repeatedly to safeguard the interests of homegrown retailers operating offline and online.
In 2018, India tweaked its FDI rules to stop foreign ecommerce companies from offering products via seller entities where the former held equity stakes higher than 25%.
There is also pressure on ecommerce companies to take responsibility on behalf of sellers to mention the ‘country of origin’ on every product sold across their marketplaces. Media reports also suggest that the Indian government may tighten the FDI rules further and ban a seller if a foreign ecommerce company holds an indirect stake in it through its parent company.
This change will hurt Amazon India the most as it holds indirect stakes in two of its biggest online sellers in India, Appario and Cloudtail.
More concerns have been raised about India’s 2% equalisation levy or digital services tax, but the government has clarified its intention. “If there is an economic benefit from a certain jurisdiction, there has to be some taxation in that jurisdiction… The OECD (Organisation for Economic Co-operation and Development) is also moving in that direction… If you have an economic presence and economic gain, you must have taxation in that jurisdiction. (If) you have billions of dollars of revenue in a certain jurisdiction, you have to pay taxes,” said commerce ministry secretary, Anup Wadhawan.
What Has Changed In The Biden Era
Unlike the Trump era between 2016 and 2020, both Amazon and Walmart-backed Flipkart are likely to get more backing from the current U.S. government, run by the Democrats with Joe Biden at the helm of the world’s most powerful country. To put things in perspective, Donald Trump, who lost to Biden in the 2020 Presidential elections, was critical of Jeff Bezos and his policies, especially as the business tycoon also owns the pro-Democrats newspaper The Washington Post. Understandably, the Post had often criticised Trump’s economic policies, and he had frequently attacked Amazon, claiming that the ecommerce Goliath dodged billions of dollars in taxes by misappropriating subsidies from the US Postal Service.
However, Trump’s defeat in the Presidential polls has given American ecommerce companies the much-needed lobbying muscle, required to survive the business challenges in India.
The outcome is visible in the latest Congressional Research Service (CSR) report, submitted to the Biden administration, which has called out the impact of India’s FDI policy on the investments made by Amazon and Walmart (via Flipkart) in India.
The CRS report (from Dec 23, 2020) says, “India aims to attract foreign investment and has made FDI reforms, such as raising foreign equity caps for insurance and defense, and other strides to improve its business environment. (The) US concerns about investment barriers persist nevertheless, heightened by new Indian restrictions on how e-commerce platforms such as Amazon and Walmart-owned Flipkart conduct business.”
Will These Concerns Affect Indian Investments?
Frequent policy changes in India have worried ecommerce giants Amazon and Walmart. The former has committed $6.5 Bn in investments in India while Walmart has already invested $16 Bn to acquire Flipkart in 2018.
But the ease of doing business seems far from ground realities. In recent times, the Enforcement Directorate (ED) started probing Amazon India for alleged violations of the Foreign Exchange Management Act (FEMA) after it received communication from the commerce ministry seeking “necessary action” against ecommerce players like Amazon and Flipkart pertaining to certain multibrand retail businesses and an observation made by the Delhi High Court in relation to Amazon.
Besides, the Karnataka High Court is hearing the Competition Commission of India’s (CCI is India’s antitrust watchdog) plea for vacating the stay on a probe into alleged anti-competitive practices by Amazon and Flipkart. The investigation was started based on the complaints filed by trader bodies. In fact, India is mulling over revising its FDI rules after traders in the country accused Amazon’s Indian division and Walmart’s Flipkart of creating complex structures to bypass investment regulations as stated in the Press Note 2.
Since 2016, the government has introduced ad hoc Press Notes, increasingly tightening FDI policies for these e-commerce marketplaces. The latest version, Press Note 2 (2018), allows 100% FDI in B2B ecommerce, or the marketplace model, but under certain conditions. It was issued to clarify the 2016 Press Note on the same topic after allegations were made about the initial norms not being tight enough. But traders are now demanding additional measures.
Why Government Cannot Afford To Overlook Domestic Traders
“India has more than 1 Cr GST-registered taxpayers, which is not a small number. Certainly, at this stage, the government will come out with a press note to help these traders because issuing notifications will take time. The authorities are likely to issue some restrictions on the marketplace model of ecommerce, thus safeguarding traders’ interests,” says Abhishek Rastogi, partner at the law firm Khaitan & Co.
According to Press Note 2, ecommerce companies operating marketplaces have to meet certain conditions. First, they will not own any inventory sold on their respective marketplace or influence the sale of goods directly or indirectly. Second, it prohibits any e-commerce entity or its group company/companies from holding an equity share in a vendor’s (seller) firm that intends to sell on the said e-commerce entity.
Rastogi says that all import/export restrictions between countries and the WTO guidelines on tariffs will directly relate to mutual trade agreements. But investment-related decisions regarding the marketplace model should not significantly impact trade relations because India has the right to take such calls. As for the marketplace model, the likely measures may include simplifying the norms and stating clearly how indirect stakes in the Indian subsidiaries of these global companies are to be managed. Crystallising these policies under the ecommerce domain will help prevent further sporadic changes and have legal sanctity.
Now, let us look at the Draft Ecommerce Policy and what it says. According to the draft, whenever changes in ecommerce regulations impinge upon the digital economy, the views of the nodal ministry must be sought. Further, the FDI policy aims to invite and encourage foreign investment in the ‘marketplace’ model alone. Therefore, an ecommerce platform in which foreign investment has been made, cannot exercise ownership or control over the inventory sold on its platform. On the face of it, there is enough clarity. But no one knows for sure whether the policy, once implemented, will stick to its core structure and will not introduce sporadic curbs based on public demand.
The Swadeshi Pull For An ‘Atmanirbhar’ Bharat
In the swadeshi-versus-videshi battle in the Indian ecommerce space, things are getting more aggressive. Everything that Amazon and Flipkart (since the Walmart acquisition) stand for seems to be against all things local and atmanirbhar (self-reliant), in sync with the political sentiment of the times. Likening Amazon to the East India Company, domestic lobby groups tag Mukesh Ambani’s Reliance Industries and its subsidiaries across retail, telecom and technology under the swadeshi label even if its scale and scope are similar to what global businesses are seeking in India.
Interestingly, themes and slogans like atmanirbharta and Make-in-India have cemented the current government’s popularity over the years. And that makes it harder to draw the line between two sets of policies — one that brings investments and another that brings votes.
Moreover, when the government seeks to promote MSMEs, it will focus on the desi brigade, and the demand for changes in FDI regulations for marketplaces is likely to favour homegrown traders, say trade experts.
Why India Cannot Ignore Biden Despite Swadeshi Sentiments
In spite of the trade conflicts at home, India has much to negotiate with the current US President, Joe Biden. In 2019, former US President Donald Trump terminated India’s designation as a beneficiary developing nation under the Generalised System of Preferences (GSP) trade programme. The US is now seeking greater access for made-in-America products across farming, medical devices and agricultural implements and a cut in import duties on some information and communication technology products. In turn, India is seeking resumption of export benefits to certain domestic products under the GSP, exemption from high duties imposed by the US on steel and aluminium products, and greater market access for its products from sectors such as agriculture, automobile and automobile components and engineering.
Jayant Dasgupta, former Indian ambassador to the WTO, told Inc42 that ecommerce issues would certainly be among the concerns that India-US trade discussions would touch upon, considering that the US is one of the biggest foreign investors in India. “The top concerns on the table are likely to be related to restoring GSP benefits, ironing out issues concerning H1b visas and caps on medical devices, and concerns around data localisation in addition to FDI in ecommerce,” he said.
US goods and services trade with India totalled an estimated $146.1 Bn in 2019. Exports to the US stood at $58.6 Bn while imports from that country were $87.4 Bn. The US foreign direct investment (FDI) in India (stock) was $45.9 Bn in CY2019, an 8.1% increase from the previous year. Given this scenario, balancing priorities between key sectors (like agriculture and manufacturing) and ecommerce will be a tightrope walk for Indian regulators if U.S. trade lobbies harden their stand.
The China Threat
Of course, relations with the US are not India’s only concern. For some time now, the country has been taking initiatives to reduce its trade dependency on China. In the past year, India has scrutinised popular Chinese digital platforms as well as the FDI inflow from Chinese investors, triggered by the ongoing geopolitical conflict between the two countries. Given the size and the scale of the Chinese economy, it is natural for India and the US to continue to support each other to offset their China dependency.
“If India gives any concession to the US, it has to be under the MFN (Most Favored Nation) clause, which automatically extends to China and many other nations under the WTO guidelines. Although the US stands to gain the most due to the quantum of trade with India,” said Dasgupta.
This brings us back to how far India’s stand on FDI for ecommerce marketplaces can weigh on the country’s relations with the Biden government? The long answer is that it is complicated. Amazon is certainly known for undercutting sellers with its own network of sellers to drive profits. So, the government is likely to put domestic traders first.
The short answer is: India is free to take these measures to protect domestic sellers.
However, the size of these two global ecommerce marketplaces alone is expected to push the U.S. lobbies for a comprehensive ecommerce policy with less scope for sporadic changes. However, experts suggest that the U.S. lobbies may also try harder to nibble away at the restrictions on the ecommerce giants if they are ratified into policies. But that is a concern for another time.