The E-Comm Debate In India

Ajit Balakrishnan offers a thinking man’s guide to the state of e-comm in a nation of shopkeepers.

News reports about consumer e-commerce are getting increasingly heated as you can see from headlines a few days ago, comparing Amazon.com with the East India Company, an official Government of India press release promising to 'democratise digital commerce', and the news reports from China saying the Chinese government has fined Alibaba, its star e-commerce giant, $2.75 billion for 'violating anti-monopoly rule violations'.

Then there are reports that the Indian government is considering establishing an independent regulatory authority for e-commerce such as the Securities and Exchange Board of India is for the capital markets.

I can't but wonder what is bringing all this hostility towards e-commerce.

Wasn't it the thing which, for example, made it easy for us avid book readers to get the books we wanted at a click of the button, or us avid travellers to not have to wait in endless queues to buy air tickets, or allowed our youth to merely insert their bio on a job site and get a flurry of employers calling them for interviews?

When you dig a little, you quickly start worrying.

With our millions of small grocery shops and uncounted travel agents and other shops, India can truly be called the contemporary world's 'nation of shopkeepers'.

While the original use of the phrase 'nation of shopkeepers' was supposedly by Napoleon in describing the British, if there is any country today that can truly be called a nation of shopkeepers, it has to be India.

India has, as of now, nearly 13 million retail grocery stores (or kirana stores, as they are called north of the Vindhyas), contributing 10 per cent to India's gross domestic product and accounting for 8 per cent of India's employment.

So-called 'modern retail' is just 8,000 outlets, which make up a mere 0.05 per cent of the total and online e-commerce less than 2 per cent of retail sales.

Then why these headline-grabbing debates about new laws to govern 'Internet intermediaries'?

Let's first deal with why the notion of 'intermediary' exists, what it is and what it is not, and, most importantly, why 'intermediaries' are as critical for the Internet era as 'factories' were in the industrial era.

For the Internet (and the World Wide Web) to function correctly and deliver all its promise of productivity gains, it needs an entity that dispassionately matches the offer of a product or service with someone who wants to consider using/buying that product or service.

This is because just as factories in the industrial era enabled a lower cost of production by bringing into play economies of scale, intermediaries bring into play network effects, the key process of achieving increased efficiency in the matching process.

Further, for this matching process to achieve a societal benefit, we have to ensure that none of the players on either side of the matching situation games the system.

Everything about 'intermediary rules' and 'intermediary guidelines' is about ensuring this lack of system gaming.

What are the ways players are gaming the Internet intermediary system?

The classic one is to 'subsidise' one side of the two-sided function of the intermediary.

Such 'subsidising' is what results in the mind-boggling operating losses that Internet companies report and the equally mind-boggling valuations they, at the same time, get from both private equity/venture capital investors and the public markets.

Still another game under way is the Walmart example.

Walmart struggled for years to establish themselves in India but could not overcome the strong opposition it faced from politically powerful Delhi-based retailers. They found a way out, by buying out online e-commerce player Flipkart.

As you can see, what looks like and was applauded as a success story of young Indian start-up founders was, in effect, a backdoor entry for Walmart into India.

Watch out for more such plays behind the unicorn headlines that you read almost every day nowadays.

Scholars like Bartholomew Watson of the University of California, Berkeley, believe that what outcomes will happen eventually in each country are more dependent on political factors rather than economic or technical factors.

'Retailers are amongst the most connected actors in political economy, with ties to numerous economic and political players, including consumers, suppliers, workers, and both local and national governments,' he says.

We can see some of these forces to empower our small-shop retailers at play in India already.

JioMart seems to be planning a gigantic effort to reach out to millions of India's small shops through apps like WhatsApp.

The kirana tech movement in India -- with multiple hi-tech start-ups working to empower kirana stores with payment systems, and hi-tech payment companies now focusing on payments generated by small merchants such as the kirana store -- is another example.

Separately, what should one make of the recent Chinese government announcement that new regulation will be issued soon to control Chinese tech companies like Alibaba, Baidu, and Tencent, and prevent any attempts by them to 'disrupt market order, damage consumer rights, or threaten data security'?

Apart from the Chinese government fining Alibaba, a new draft policy will force education start-ups to go non-profit, a measure meant to ease the pressure on poorer students and their parents.

Shall we merely recite, 'It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.'

Or gather all our energies and re-examine our industrial era versions of India's Competition Act, Information Technology Act, and similar statutes, and ensure a smooth transition for us, the nation of shopkeepers, to the information age?

Ajit Balakrishnan (ajitb@rediffmail.com), founder and CEO, Rediff.com, is an Internet entrepreneur and as a member of the committee that updated the Indian IT Act 2008 personally wrote Section 79 which introduced the concept of 'Intermediaries' and governs Internet platforms.