Amazon and Walmart’s Flipkart get caught as India is tightening retail regulation

Source:Global Times Published: 2019/2/10 19:03:39

Online shopping baskets in India are about to get lighter. Amazon and Walmart will be limited to operating a marketplace and prevented from acting as retailers under stricter rules which came into effect on Friday, resulting in products disappearing from the virtual shelves. The miscalculation on the direction of this policy could be very costly for these two global brands.

New Delhi is clamping down on a long-standing policy to keep foreign investment out of big retail. It means Walmart, which recently ploughed $16 billion into India's Flipkart, and Amazon can no longer sell products from companies in which they own a stake, nor push vendors to sell goods exclusively through their online services. They must also ensure they account for no more than a quarter of any merchant's purchases. 

Amazon and Walmart, whose combined market values are $1.1 trillion, will suffer because they have been adhering to the letter, rather than the spirit, of India's rules. Through complex structures, they replicate some benefits of an inventory-led business model, leveraging scale to deliver goods to consumers faster and cheaper. Cash rewards are often thrown in, too. For example, Amazon owns a minority stake in the parent company of Cloudtail, which is backed by Infosys co-founder and billionaire Narayana Murthy. It is one of Amazon's biggest vendors. Under the latest rules, Cloudtail will not be allowed to sell on Amazon,nor would Amazon's own fledgling food business.

As a result of the changes, online sales could fall by $46 billion by 2022, according to a draft analysis by consultancy PwC, seen by Reuters. The overhaul also creates room for local operators to dominate, as is the case in China. Indian billionaire Mukesh Ambani, for one, will gain an edge as he attempts to turn his $109 billion Reliance Industries into a retail and media empire akin to the one built by Jeff Bezos.

New Delhi only belatedly has decided to enforce its original intended policy aims. In their eagerness to grab market share, however, Amazon and Walmart too lightly dismissed the risk that such change would happen. Ahead of an upcoming general election, politicians will be counting on votes from the country's millions of appeased shopkeepers. The U.S. retailers can only consider how they want to proceed in India from here. 

The author is Una Galani, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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