MUMBAI -- India's new restrictions on how e-commerce companies such as Amazon and Walmart's Flipkart sell in a fast-growing online market could spark accusations of protectionism from the U.S. government, analysts say.
The regulations announced on Wednesday ban e-commerce companies from selling products through local businesses in which they hold a stake, and also tighten rules on practices such as deep discounts.
Both U.S.-based companies have been investing heavily in India's e-commerce market, often to the ire of local bricks-and-mortar retailers and smaller vendors. Walmart spent $16 billion earlier this year to buy a 77% stake in Flipkart, while Amazon has earmarked a $5 billion investment in the country.
The rules, which take effect on Feb. 1, appear to hit Amazon's local joint ventures Cloudtail and Appario Retail, as well as Walmart's plans to sell products through Flipkart. Cloudtail is led by IT services provider Infosys' co-founder N.R. Narayana Murthy, while Appario is a joint venture with Ashok Patni Group, one of India's largest retailers.
Amazon and Walmart together hold more than a 60% share of India's estimated $19.6 billion online retail market. The India Brand Equity Foundation projects India's e-commerce revenue at $120 billion in 2020, up from $39 billion in 2017. That makes for an annual increase of 51% -- the highest growth rate in the world.
Harish H.V., a partner at accountancy Grant Thornton, says foreign e-commerce companies will have to adapt to the new rules, which will hamper their ease of doing business.
"I think the U.S. is going to make a big noise about it because Walmart has just put in $16 billion," he said. "If Amazon, too, thinks it is affecting their way of doing business, they may go and complain to the U.S. government, saying these are restrictive practices."
According to TRA Research CEO N. Chandramouli, rules in e-commerce should keep customers' value in mind and let companies figure out how to win competition.
"Walmart is a very heavy investor both in Indian e-commerce and in the U.S., so naturally policy pressures will come. After they invest, you cannot make a rule that will jeopardize anyone's investment," he said. "Every country is looking at India. India has not blossomed fully as [a foreign direct investment] destination yet. ... I don't think India should go in for protectionist measures now."
India seems to have partly given into the demands of local players, as Prime Minister Narendra Modi seeks a second term in elections during the first half of 2019. Traders and small businesses form a very large voter base, with strong allegiance to Modi's Bharatiya Janata Party. They faced the brunt of the disruption caused by the Modi government's ban on high-value bank notes in 2016 and the subsequent introduction of a nationwide Goods and Services Tax.
With a dismal performance in elections held in several states earlier this month, Modi is unlikely to take any chances with his popularity.
U.S. President Donald Trump, meanwhile, has complained about Indian tariffs. During the Group of Seven summit in July, Trump accused New Delhi of imposing duties of up to 100% on some U.S. goods and threatened to cut ties to countries that were "robbing" America. Pointing to high tariffs on Harley-Davidson motorcycles, he has threatened to raise duties on Indian-made motorbikes imported to the U.S.
The new rules announced on Wednesday evening say that "an entity having equity participation by e-commerce marketplace entity or its group companies, or having control on its inventory by e-commerce marketplace entity or its group companies, will not be permitted to sell its products on the platform run by such marketplace entity."
The rules also bar these companies from giving preferential treatment to suppliers, and require cash-back incentives for customers making online purchases to be paid regardless of whether items are bought from affiliates of the e-commerce platform.
"Provision of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory," the statement said. It asked e-commerce marketplace operators to furnish a certificate along with an annual report from the statutory auditor to the Reserve Bank of India, confirming compliance of the new guidelines, by Sept. 30 every year.
Local vendors and companies welcomed the new rules, which are largely in tune with their complaints against e-commerce businesses.
In October, the All India Online Vendors Association, which represents around 3,500 online sellers, had complained to the Competition Commission of India, alleging preferential treatment by Amazon toward Cloudtail and Appario. There were also allegations that foreign companies sought a backdoor entry into the restricted multibrand retail segment.
The Confederation of All India Traders, another trade body that has over 70 million merchants as members, praised the government for bringing clarity on FDI in e-commerce "to wipe out confusion and a communication gap, which was used as a tool by the e-commerce players and [multinational companies] for playing their own game."
"Clarifications by the government will prove to be an embargo on such practices. It's a big achievement after a long struggle," CAIT Secretary General Praveen Khandelwal said. "If it is implemented in proper spirit, malpractice and predatory pricing policy and deep discounting by e-commerce players will be a matter of the past."