India’s Weird Decision To Ban Vertical Integration In E-Commerce

There’s near no useful economic explanation for what India is doing in the field of e-commerce – online selling of goods and products. There’s good political reason of course, which is why it’s happening. But then this is just a confirmation of that thought that bad politics overrides good economics. For what’s happening is an absolute ban on vertical integration in that retail e-commerce. Therefore companies like Amazon and Flipkart cannot own equity stakes in any of the people who sell on the platforms. Nor, logically enough, may they sell their own products through their own marketplaces.

The argument is that they are providing a marketplace. Thus they cannot have any close connection with anyone selling on that market as this would leave them open to bias – or at least accusations of such. If they did own an actual manufacturer or provider then they’d be tempted at the very least to favour that one over other users of the market infrastructure. This is to take a very narrow view indeed of what constitutes the market and it is to do so for purely political, not economic, reasons:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] Amazon’s food-only retail business will stop selling on Amazon.in if the government’s latest foreign direct investment (FDI) guidelines remain unchanged by next month. This would be a blow for the initiative as Amazon was the only foreign retailer to have committed investment — to the tune of $500 million — in the food retail segment after it opened up in mid-2016. In addition, Amazon’s planned acquisition of a stake in Future RetailNSE -0.68 % may be delayed, people familiar with the matter told ET. [/perfectpullquote]

Clearly the rule isn’t aiding or abetting consumers as such an investment would. For the rules are deterring the investment.

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]The government tightened norms for FDI-funded ecommerce companies including Flipkart and Amazon in December and said such entities cannot exercise ownership or control over inventory. They must provide services such as warehousing, logistics and advertising to all sellers in a fair manner. It also disallowed ecommerce companies from entering into pacts for the exclusive sale of products and from holding equity stakes in their sellers.[/perfectpullquote]

So, why is this being done? Because India’s extant retail sector makes up a considerable political lobby. And it’s one that is entirely aware that it’s inefficient and risks being swept away by this new online world. Thus the political power is being deployed to handicap online, so as to preserve the current economic landscape.

This is clearly and obviously anti-consumer. That inefficient industry is preserving and perpetuating its position at the expense of those consumer interests. That’s the very reason all of this is happening. India’s retail industry is famously expensive and inefficient, that’s exactly why is is being so protected.

Actual economics would tell us that the online sellers should be freed to do as they wish in order to benefit consumers. Politics says otherwise and at least so far in India politics wins.