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Published on: Oct. 4, 2021, 1:06 p.m.
Dissonance over e-commerce
  • The Indian e-commerce sector will reach $99 billion by 2024 from $30 billion in 2019

By Rakesh Joshi. Executive Editor, Business India

Union commerce and industry minister Piyush Goyal, also in charge of the Ministry of Consumer Affairs, Food and Public Distribution, is regarded as one of the sheet anchors of the Modi government, one who is expected to weigh his words carefully before talking on policy-related issues. Recently, he was given additional charge of the textiles ministry. 

Yet on 14 August, he stirred a hornet’s nest when he used the platform of Confederation of Indian Industry (CII) to announce that many big domestic businesses, including the Tata Group, had overlooked national interests in objecting to the proposed policy changes for e-commerce. It now turns out that the draft e-commerce rules unveiled by the consumer affairs department this June saw Goyal being virtually isolated within the government.

The finance ministry, the department of promotion for industries and internal trade (DPIIT), the department of corporate affairs and NITI Aayog, the Centre’s think-tank, raised serious questions over the draft rules which if adopted could vitiate the investment climate. 

The only support which the draft rules got was from the Ministry of Micro, Small and Medium Enterprises. Goyal’s comments were seen to appease the traders’ community, led by the vocal small traders’ lobby, Confederation of All India Traders (CAIT), and Delhi Vyapar Mahasangh, which have been railing against online retailers, particularly, foreign players like Amazon and Flipkart (now owned by US-based Walmart). CAIT in fact has emerged as a strong votary of the draft rules.

Recently, it had gone hammer and tongs against NITI Aayog for “interfering” in the e-commerce rules proposed by the Consumer Affairs Department and said that the line taken by NITI Aayog clearly seems to be under the pressure and influence of the foreign e-commerce giants. “It is highly unfortunate that NITI Aayog in the last seven years since its inception had done absolutely nothing to support the 8 crore traders of India and now when the government is trying to create a level playing field in the retail sector, NITI Aayog is interfering in between and trying to derail the process,” Praveen Khandelwal, general secretary, CAIT, said. In the past, CAIT has openly supported the Bharatiya Janata Party in elections. 

The minister also appears to have been guided by the fact that maximum consumer complaints received at the government’s National Consumer Helpline were related to the e-commerce sector. As per the government data, 36 per cent of the 19,180 consumer complaints were related to e-commerce between April-July of this year, followed by banking (9 per cent) and electronic products (6 per cent). Consumer affairs department officials maintain that amid the rise in consumer complaints related to e-commerce, the department hit upon the idea of addressing the problems surrounding e-commerce business in a holistic way via the draft rules.

Pushback by ministries

Meanwhile, officials manning key economic ministries told their political bosses that while modernisation of e-commerce will help create more jobs and boost the economy, continuous change of the policy causes a great deal of uncertainty among investors. Out of estimated 7 crore traders, 85 per cent are micro traders and are benefitting from the current e-commerce policy. So there was no need for an overhaul of the rules. As a result, Leena Nandan, secretary, Department of Consumer Affairs, had to step in to soothe the frayed ministerial nerves.

The secretary had said e-commerce, which emerged as a relevant sector last year, continues to be so even now. She said the government will take a “balanced” approach while finalising the amendments proposed to the rules as “wide and varied” comments have been received from stakeholders. This followed the pushback from the industry and influential sections within the government.

Goyal, of course, now maintains “strong feedback” will help in preparing a robust e-commerce policy even as he termed reports of differences within the government on the proposed policy as efforts to “sensationalise any feedback”.

Upward trajectory

The Indian e-commerce industry has been on an upward growth trajectory and is expected to surpass the US to become the second largest e-commerce market in the world by 2034. The sector will reach $99 billion by 2024 from $30 billion in 2019, expanding at a 27 per cent CAGR, with grocery and fashion/apparel likely to be the key drivers of incremental growth. Just the online grocery market is estimated to reach $18 billion in 2024 from $1.9 billion in 2019, expanding at a CAGR of 57 per cent. 

According to Forrester Research, Indian e-commerce sales rose by 8 per cent in 2020. The lockdown and other Covid protocol restrictions that followed forced many shoppers to go online. With such high stakes involved, the draft rules were clearly destined to go out of the window.

Hence it came as a surprise when Goyal seemingly shot off his mouth. Goyal’s comments on Tata came after media reports that the conglomerate was among most vociferous in telling the government in a July meeting that the proposed e-commerce rules will have a major impact on its business and bar its joint venture partners like Starbucks from selling goods on Tata’s shopping websites. At the CII event, Goyal said Tata’s objection to the rules had hurt him, saying he had conveyed that position to N. Chandrasekaran, chairman, Tata Sons.

In the past, the minister had also criticised Amazon and Walmart’s Flipkart for allegedly bypassing foreign investment rules for e-commerce. Recently, he also invoked the “Quit India” movement in Parliament as he welcomed a court order that allowed an antitrust probe of the two companies to continue. This is almost akin to RSS-affiliated magazine Panchajanya’s description of Amazon as another “East India company 2.0” which followed.

Interplay of politics, diplomacy

Evidence of the strong dissonance within the government over the draft e-commerce rules and the interplay of domestic politics and diplomacy is now coming to light with the finance ministry describing some proposals as “excessive” and “without economic rationale”. A memo from the finance ministry’s Department of Economic Affairs on 31 August said the rules appeared “excessive” and would hit a sector that could boost job creation as well as tax revenue. “The proposed amendments are likely to have significant implications/restrictions on a sunrise sector and ‘ease of doing business’,” said the three-page memo. “Care needs to be taken to ensure that the proposed measures remain ‘light-touch regulations’.”

Interestingly, the arguments put forth by the finance ministry (and NITI Aayog) are in line with concerns raised by sector operators, and more importantly the US government. They say New Delhi has in recent years changed e-commerce policies too often and taken a hard-line regulatory approach that especially hurts American players. It is not a coincidence that the repudiation of the e-commerce draft rules came on the eve of Prime Minister Narendra Modi’s visit to the US.

NITI Aayog steps in

Records obtained by The Indian Express under the Right to Information (RTI) Act show that key provisions of the draft rules were stridently opposed by the Industry department and Corporate Affairs ministry – and the Niti Aayog vice chairman Rajiv Kumar who has warned that they “will severely harm Ease of Doing Business and impact small businesses.” The DPIIT has flagged several anomalies, questioned some provisions and suggested remedial tweaks in an office memorandum sent to the Consumer Affairs Department.

One of the issues making businesses and government departments nervous is “fall back liability,” which makes e-commerce liable to compensate the consumer if the seller registered with the entity fails to deliver the goods or services exactly in the way described on the platform. Many have demanded that it should be done away with. “The concept of fall back liability should be done away with because it dilutes the intermediary safe harbour under the provisions of the IT Act as well as the arm’s length requirements provided under the FDI policy,” says industry body Internet and Mobile Association of India. Official sources concede the “fall back liability” will be in conflict with the intermediary safe harbour clause of the IT Act – a case of the left arm (in the government) now knowing what the right one is doing.

Key divergences

Apart from “fall back liability”, a key portion of the draft that has come under fire from within the government are the changes proposed under “duties of sellers on marketplace, inventory e-commerce entities”. In its office memorandum, dated 18 July, the DPIIT said: “The concept of ‘fall back liability’ may be examined in view of Product Liability provision as per Section 2(34) and Chapter VI of the Consumer Protection Act 2019.

It may be evaluated if introduction of a new concept of ‘fall back liability’ is necessary in view of existing legal provisions. The definitions of Cross Selling, Miss-selling and Flash Sale may be re-examined. These concepts are addressed under the ethical and responsible e-commerce. It may be examined whether introduction of these new concepts is required”.

According to the Consumer Protection Act, 2019, product liability is defined as “the responsibility of a product manufacturer or product seller, of any product or service, to compensate for any harm caused to a consumer by such defective product manufactured or sold or by deficiency in services”.

This, along with the Chapter VI of the Consumer Protection Act, lays the responsibility of the defective product on the seller or the manufacturer. However, the proposed e-commerce rules, which are being notified as part of the Consumer Protection Act, make online marketplaces responsible for any shortcoming in products delivered through their platforms.

Questioning FDI policy

Industry players have also pointed out that while the FDI policy prohibits companies such as Amazon and Flipkart from having control over inventory sold on their platforms, the e-commerce draft rules holds these platforms liable in case a seller fails to deliver goods or services due to negligent conduct, which causes loss to the customer.

The DPIIT has suggested that duties of sellers on marketplace, inventory e-commerce entities may be aligned with the framework in Draft National e-Commerce Policy. “The objective is to prevent sellers from engaging in any type of activities that result into market distortion,” it noted.

The DPIIT has also called into question the outright banning of flash sales which limits consumer choices. The department feels that concepts such as cross-selling, mis-selling and flash sales “are addressed under the ethical and responsible e-commerce”. In addition, the DPIIT has called for start-ups and MSMEs to be exempted from compliance of the new e-commerce rules.

Forum shopping

The Ministry of Corporate Affairs, in an office memorandum dated 22 July pointed out the overlap between some of the proposed provisions and the Competition Act. It has said that as a result of these provisions “consumers may be prompted… to bring cases of abusive conduct against dominant enterprises before consumer fora…”.

“This will create a fertile ground for forum shopping besides regulatory overlaps, thereby resulting into a potential scenario of divergent rulings,” it added.

Niti Aayog has also echoed concerns of overlap with existing laws and regulations. In a 14 July memo, Niti Aayog said: “The proposal restricting the listing of related parties on e-commerce platforms appears to be a case of overreach.” Separately, Rajiv Kumar, vice chairman, NITI Aayog, wrote in his letter to Goyal: “In the post pandemic recovery period, it is necessary to give a major impetus to MSMEs, small businesses through e-commerce utilising the strength of digital India. The draft Rules would adversely impact the recovery rate”. 

Experts weigh in

Market experts point out that it is ironic that the definition of e-commerce entity under the draft rules does not make a distinction between FDI and non-FDI marketplace, which seemed to have been the main driving agenda behind the new regulations. These experts feel that the new rules will lead to a chaotic situation as many provisions are in contrast with, or replicate provisions of other existing laws that are already in force and under jurisdictional purview of other regulators. Several proposals go beyond the scope of the consumer affairs ministry’s rule-making powers under the Consumer Protection Act.

The rules pertaining to the ability of a marketplace entity to provide support services to sellers have already been set out in Press Note 2 of the FDI rules which allow e-commerce companies to provide ancillary services such as warehousing, order fulfilment, logistics and payment collection. The Press Note already imposes a restriction on sellers listed on a marketplace to buy a maximum of 25 per cent of its inventory from a related party of the marketplace entity.

Further, a wholesale entity is permitted to sell goods to any B2B entity in India, subject to restrictions, and general KYC requirements applicable to its business. Traditionally, the provision of services simplicitor, whether on B2C or B2B basis, is expressly and historically permitted under FDI under 100 per cent automatic route.

In terms of compliance officers assisting law-enforcement agencies, the IT Act already mandates the appointment of officers to help with responses to the government, for responses to cyber security incidents. The data-sharing mandate under the draft rules has already been proposed to be regulated under the upcoming Personal Data Protection Bill, 2019.

Compliance burden

India already has a robust and comprehensive set of laws/regulations to deal with most facets of business envisaged by the draft consumer protection e-commerce rules. Experts fear that if the draft rules are implemented, it will only add a layer of compliances and mandatory procedures which will ultimately have a telling effect on Ease of Doing Business.

Then there is the issue of the signals that are going out. In the last few years, the Modi government has been taking steps to regulate the policy environment. Initially, social media companies came under intense scrutiny from the government, which was quickly followed by a set of rules that sought to regulate such companies. The government then focused its attention on the media. Now, the government is looking to regulate e-commerce companies.

The draft rules, if implemented, will take us back decades. In the last 30 years, India has also developed a robust legal and judicial framework. India needs to implement the existing laws to uphold competitive business while also protecting the consumer and small businesses, not bring in new rules to please influential political lobbies. Clearly, a decent burial for the draft rules will settle the matter.

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