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India's Ecommerce Policy - Blessing or Curse for Businesses?

By Anne-Kathrin Velten

The Indian e-commerce market is young. But given the size of the market, understanding how the world's largest democracy is dealing with growth is vital. The market is expected to reach $ 200 billion by 2026. This is mainly made possible by the increasing use of the Internet and smartphones. By 2021, 829 million Indians are expected to be connected to the internet. In 2018 it was 560 million. In percentage terms, however, this corresponds to just under a third of the Indian population. This means that the Indian market is already larger than that in the USA in absolute terms.

The fact that India is a very young country also speaks in favor of rapid growth in the coming years. Around 75 percent of Internet users are between 15 and 34 years old and are therefore particularly interested in online shopping. Two big players dominate the Indian e-commerce market: the local retailer Flipkart and the US e-commerce giant Amazon. The Indian e-commerce payment system Paytm with Paytm Mall follows a little behind.

Government obliges providers to adopt a marketplace model

To ensure that growth is controlled, the government is working on its national e-commerce strategy. According to this, every provider must follow the marketplace model. The government criticizes the fact that the actors currently do not technologically fulfill this condition in the narrower sense. The marketplace model offers various providers and sellers a platform. It serves as an intermediary between seller and consumer. This means that it must have an IT infrastructure and can offer the providers it hosts logistical support such as storage and payment entry.

According to the Indian government, Amazon and Flipkart tend to follow the inventory model. The e-commerce provider owns the inventory, which it sells directly to consumers. For example, Amazon owned 49 percent of Cloudtail and Appario - both Indian companies that are also the largest sellers of Amazon India. They make up around 500,000 of the products sold. Another example is WS Retail. Flipkart's largest merchandise seller was founded by the Flipkart owners who then spun it off as an independent entity.

India's five pillars for more competition

Marketplace websites create more competition. According to the government, this results in constant improvements in product and service quality and more attractive prices. To make the e-commerce market more competitive, India relies on five pillars:

  1. Each market has to submit a compliance report to the Reserve Bank of India every year: this point only increases the administrative burden for platform operators.
  2. A marketplace cannot sell more than 25 percent of the value of goods from a single vendor: When this policy went into effect in February, more than 300,000 products from Cloudtail and Appario were removed from Amazon India. Most of these are now being sold by other vendors.
  3. A company that has a significant share partnership with a marketplace cannot sell its products on the platform operated by this marketplace: To meet this requirement, Amazon had to reduce its stake in Cloudtail and Appario from 49 to 24 percent.
  4. A marketplace cannot hire a seller to sell products exclusively on their platform: this is the point that hurts companies the most. The sale of smartphones is the strongest sales driver in e-commerce. All large companies want to enter into exclusive partnerships with smartphone manufacturers. For example, Flipkart had an exclusive partnership with Xiaomi, so most of Xiaomi's new models for India were only sold through Flipkart. These agreements enabled e-commerce providers to offer discounts, which increased sales.
  5. A marketplace cannot grant direct or indirect discounts on products: This is where the hidden potential of Indian e-commerce politics lies. Ecommerce businesses' profit margins in the smartphone and electronics categories were in the low single digits, while other categories such as fashion, FMCG, and home furnishings averaged 25-35 percent profit margins. According to a study by RedSeer, from 2015 to 2018 ecommerce players only focused on adding sellers quickly as they tried to become the leading marketplace for India. However, they concentrated almost exclusively on the fastest growing segment: the sale of smartphones and electronics through direct brand partnerships. The growth in this category can neither be sustained, nor is this product mix interesting for consumers in the medium term. The new regulation indirectly forces providers to be more diverse. This is initially a hurdle, but in the medium term it will allow companies to better follow trends and offer attractive products.

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