Narendra Modi's Flipkart test PDF Print E-mail
Thursday, 09 October 2014 00:08
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Why should the government intervene in what is essentially a fight in the marketplace?

No law prohibits a Flipkart from selling at a large discount, or even below cost, as long as it is not a monopolist -- and it is far from that given etail's <1% market share. Stop this, and the government will have to stop all discounting ... it's back to the old days of the heavy hand of the state

It has to be a delicious irony if small kirana shops join hands with big organised retailers like Kishore Biyani to rail against etailers who, like Flipkart, have had a stunning debut in the market. The immediate provocation, which got commerce minister Nirmala Sitharaman to say the government was looking into the matter of huge discounting, is Flipkart’s Big Billion Day sale that, according to the company notched up sales of over R600 crore in a day, a number that even the top-most retailer in India hasn’t been able to come within sniffing distance of.

All manner of charges are being bandied about, the most quoted one being dumping and how it is illegal to sell below-cost. Both charges sound good in the television studios where fat cat retailers are being asked for their opinion, but hold little water. Dumping, for instance, requires the firm to have significant market power. But the entire etail sector selling $4 billion worth of goods, using consulting firm Technopak’s best-case scenario for the year, doesn’t even have a 1% share of the $500 billion consumer market—since Flipkart will be a fraction of this, it doesn’t come anywhere near meeting this criterion. So neither the kiranas nor the big retailers will be able to get much help from the Competition Commission of India. This is the same reason why telcos like Bharti Airtel and Hutch weren’t able to prove predatory pricing charges against Reliance Infocomm’s Monsoon Hungama in 2003.

The below-cost argument is perhaps even more hollow, and Biyani and the others making this case will have to prove it. Just because a sale is taking place below the maximum retail price (MRP) doesn’t make it below-cost. Let’s say an article costs R100 but has an MRP of R200—that’s a pretty standard thing for most goods. The difference between the two is what comprises trade margins, shared between wholesalers and retailers. So as long as Flipkart is selling at over R100, it is difficult to make a case for it selling below-cost—though, as this column has just argued, that is also permissible till such time that Flipkart is a dominant player.

Indeed, the consumer durables firms who are publicly railing against the huge discounts being offered by etailers would do well to see how these firms are procuring these goods. Chances are it is their wholesalers who are selling to these firms, preferring to sacrifice some of their margins in order to get sales volumes.

Just imagine the consequences of the government stepping into what is little more than healthy competition in the market place, and that too restricted to a very small fraction of it. If you accept the argument that etailers are selling below-cost, this means all last-minute airline seat discounts will have to stop, as will the concept of loss-leaders in all big retail chains—as part of their strategy to attract customers, all retailers have certain categories where huge discounts are given and, if need be, even losses are incurred. For years, Maruti sold the Baleno at a R2 lakh loss—it did so only because it wanted a complete portfolio of cars and didn’t want customers to start deserting it as they moved up the value chain.

If all of this is to be stopped, commerce minister Sitharaman would do well to keep in mind, we are headed back to the old days of the heavy hand of the state, where government inspectors will decide on what costs are and what discounts are permissible. Oh yes, if top retailers are incurring losses, does this mean they are inefficient or does it mean they are selling below-cost?

Two arguments invariably get made at this stage. One, etailers are getting foreign money to fund these losses, and if FDI is not allowed in multi-brand retail, how can it be allowed in multi-brand etail? Two, if jobs are being lost, how can the government stand around and do nothing?

While the government is free to pursue the cases the Enforcement Directorate and others have in any case filed against etailers like Flipkart, it is not clear if this will work since the letter of the law allows FDI in B2B e-commerce which is where the etailers are getting their FDI. And even if a case of backdoor FDI can be proved, it is worth keeping in mind that etail offers a great opportunity to thousands of SMEs to reach out to markets they could never dream of at virtually no cost since they no longer have to set up expensive distribution networks.

Improbable as it is, since such discounts can’t be funded in the long-term, if etailers indeed grab the entire market by offering huge discounts, surely there is a benefit to this that can’t be ignored? If the consumer market in India is around $500 billion and consumers are getting a 30% discount, that’s a huge $150 billion of savings. Imagine what this will do to interest rates in the country and what that, in turn, will do for stimulating investment and growth in the economy—not to mention the supply chain infrastructure that gets created to service the Flipkarts and Amazons. While the government is keen to create an efficient supply chain and back-end logistics for Indian firms, it is important to keep in mind this will never get created until there is a front-end chain to sell the goods—at one point, that front-end was supposed to be big retailers like Kishore Biyani’s Big Bazaar and Wal-Mart; but if they are not growing, etail is the best option we have.

What of the job losses? First, given the under-1% etail share, it is not clear how large these can possibly be. Two, and more important, in a dynamic economy, there are always groups of people who lose out to a new technology, but there is another lot that comes up due to this technology—is India going to side with the past against the present and the future? Between 1993 and 2004, for instance, the number of clerical workers in India fell from 8.5 million to 5.3 million—is this to be mourned since it would be apparent this has been the direct result of computers and automation and has been accompanied by an increase in productivity across most sectors? Indeed, it has been made up by an increase in workers in other sectors.

In more ways than one, this is Modi’s Flipkart test. Stopping etailers in their tracks will not just signal the prime minister’s anti-free market credentials and put India in the ranks of a handful of countries opposing e-commerce, enforcing the no-discounts policy will take us back to the dreaded inspector-raj days. For voters who are looking forward to low prices, it will be the ultimate betrayal since, in its current form, foreigners funding etail discounts is probably the most efficient direct benefits transfer scheme! A logical next step, and the government needs to think long and hard about this, is to ban all Chinese goods being imported into the country—if etailers are putting Indian retailers out of business, low-cost (or is that below-cost?) Chinese goods are putting Indian manufacturers out of business. The way Modi chooses to go will tell the world a lot about him.



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