Unravelling India’s e-Commerce Reality

Snapshot of the e-Commerce industry in India

The e-Commerce industry has a direct impact on micro, small & medium enterprises (‘MSME’) in India by offering mediums of financing, technology and training and has a favourable cascading effect on other industries as well as per report by India Brand Equity Foundation (‘IBEF’). Indian E-commerce industry has been on an upward growth trajectory and is expected to surpass the United States of America to become the second largest E-commerce market in the world by 2034. Technology enabled innovations like digital payments, hyper-local logistics, analytics driven customer engagement and digital advertisements will likely support the growth in the sector. The growth in ecommerce sector will also boost employment, increase revenues from export, increase tax collection by ex-chequers, and provide better products and services to customers in the long-term. Rise in smartphone usage is expected to rise 84% to reach 859 million by 2022.

India e-commerce sector will reach US$99 billion by 2024 from US$30 billion in 2019, expanding at a 27% CAGR, with grocery and fashion/apparel likely to be the key drivers of incremental growth. According to Forrester Research, Indian e-commerce sales rose by 7-8% in 2020. The Indian online grocery market is estimated to reach US$ 18.2 billion in 2024 from US $1.9 billion in 2019, expanding at a CAGR of 57%. As of June 25, 2021, the Government e-Marketplace (‘GeM’) portal served 6.87 million orders worth Rs.116,291 crore (US$ 15.67 billion) from 2.0 million registered sellers and service providers for 52,651 government buyers.

The Government of India’s policies and regulatory frameworks such as 100% Foreign Direct Investment (‘FDI’) in B2B E-commerce and 100% FDI under automatic route under the marketplace model of B2C E-commerce are expected to further propel growth in the sector. As per the new FDI policy, online entities through foreign investment cannot offer the products which are sold by retailers in which they hold equity stake.

Through its Digital India campaign, the Government of India is aiming to create a trillion-dollar online economy by 2025. It has formed a new Steering Committee that will look after the development of a government-based e-commerce platform. The new Committee, set up by the Commerce Ministry, will provide oversight on the policy for the Open Network for Digital Commerce (‘ONDC’), which is an e-commerce platform that the Government is backing for the development.

Key Provisions of Draft e-Commerce Rules 2021:

• Mandatory Registration: There is a need for mandatory registration for e-commerce entities with the Department of Promotion for Industry and Internal Trade (‘DPIIT’), Ministry of Commerce and Industry.
  • E-commerce entity means persons who own, operate or manage a digital or electronic facility or platform for electronic commerce.
• Limiting Flash Sales: Conventional e-commerce flash sales are not banned. Only specific flash sales or back-to-back sales which limit customer choice, increase prices and prevent a level playing field are not allowed.
• Compliance Officer: The e-commerce sites are also directed to ensure appointment of Chief Compliance Officer (‘CCO’) and a nodal contact person for 24×7 coordination with law enforcement agencies.
• Restricting Related Parties: To tackle growing concerns of preferential treatment, the new rules propose to ensure none of the related parties are allowed to use any consumer information (from the online platform) for ‘unfair advantage’.
• Clause of Country of Origin: The entities will also have to identify goods based on their country of origin and provide a filter mechanism at a pre-purchase stage for customers.
  • They will also have to offer alternatives to these imported goods to provide a “fair opportunity” to domestic sellers.
• Reporting Cybersecurity Issues: All e-commerce entities must provide information within 72 hours on any request made by an authorised government agency, probing any breach of the law including cybersecurity issues.

Major Issues Pertaining to Draft Rules:

• Definition of ‘Related Party’: The draft rules state that “none of an e-commerce entity’s ‘related parties can be enlisted as a seller for sale to consumers directly.
  • This ‘broad definition’ of ‘related party’ can potentially include all entities such as those involved in logistics, any joint ventures, etc.
  • Due to this, it will be difficult not only for foreign players but also homegrown companies to sell on their super-apps.

• Issue over Fall-back Liability: Industry players have argued that on the one hand the FDI (Foreign Direct Investment) policy prohibits companies from having control over the inventory sold on their platforms. On the other hand, the rules introduced the concept of fall-back liability, which makes the e-commerce firms liable in case a seller on their platform fails to deliver goods or services due to negligent conduct, which causes loss to the customer.
• Overreaching Jurisdiction: The NITI Aayog has raised concerns that many of the provisions in draft rules were “beyond the realm” of consumer protection.
  • This creates a perception of “overreach” by the Consumer Affairs Department.
• Case of Tight Regulation: Some of the proposed provisions like having a compliance officer, adherence to law enforcement requests, etc., are similar to the Information Technology (Intermediary) Rules, 2021.

Road Ahead

E-retail market is expected to continue its strong growth – it registered a CAGR of over 35% to reach Rs. 1.8 trillion (US$ 25.75 billion) in FY20. Over the next five years, the Indian e-retail industry is projected to exceed ~300-350 million shoppers, propelling the online Gross Merchandise Value (‘GMV’) to US$ 100-120 billion by 2025. According to Bain & Company report, India’s social commerce gross merchandise value (‘GMV’) stood at ~US$ 2 billion in 2020. By 2025, it is expected to reach US$ 20 billion, with a potentially monumental jump to US$ 70 billion by 2030, owing to high mobile usage