October 04, 2022

The government has come out with a draft e-commerce policy. This can be both good and bad news for a sector that has hitherto existed and developed in a policy vacuum. The policy can be good because it will set legal parameters that would put entry restrictions, thereby eliminating fly-by-night operators who give the trade a bad name. As per reports, the policy is going to be India-centric and is likely to benefit the domestic economy.

The bad news is that the government is also thinking of fixing floor prices of products and outlaw deep discounts or discounts below a threshold. Although one is not enamored of the deep discounting model followed by e-commerce marketplaces, one is of the view that it is their business decision and their right to price their products as they think fit. The government has no role to play in pricing and it should be left to market factors. The government is planning to introduce a sunset clause to fix the maximum duration for offering deep discount to attract new customers. But are deep discounts offered only to attract or retain customers?

It has to be recognized that some products get outdated or obsolete very fast. Take fashion wear for example. Today’s hot selling item might not fetch a tenth of the price once it goes out of fashion or newer designs are introduced. Then there is the question of size. Garments are made in all sizes. It may so happen that lots of odd sizes remain on the inventory, blocking scarce capital. Seasonal items like pullovers, cardigans, shawls etc. also need to be liquidated as the winter comes to an end. Doesn’t it make sense then to sell them off at a deep discount? In any case, some items are priced at fantastic markups when freshly introduced and cover their costs after selling a few thousand pieces. The rest of the stock can then be sold at deep discounts, sometimes less than the cost price, to recoup the capital.

In any case, it is not the e-commerce platforms alone that indulge in deep discounting nowadays. All the brick and mortar stores also do that with fashion wear and other selected merchandise. In the recent sale mania in July, the big stores like Westside, Shopper’s Stop and Pantaloons, to name just three, have offered discounts ranging from 50% to 70% on a wide range of merchandise. It has become a policy with these stores to sell off old stocks periodically at hefty discounts and fill the shelves with fresh, new products that are sold at a huge premium. How is the government going to stop them?

The government is moving against deep discounting after receiving written complaints from brick and mortar stores and mobile companies who have alleged that e-commerce platforms are misusing foreign funds to offer deep discounts. Hence, instead of going after pricing, the government should go after the foreign funding and specify clearly that such funding cannot be used to offer discounts and can only be used to upgrade operations or for other operational costs. It can mandate that e-commerce companies maintain an accounting system that clearly shows how the foreign funding was put to use. That would address the issue of deep discounting too.

The market follows its own rules. There are many questions of optimal purchasing, lower overhead costs, low marketing costs and other cost saving bulk deals that can help an entrepreneur offer better prices to consumers. Any government interference in this would result in the consumer being the loser. Further, as far as e-commerce goes, there is the question of benefits derived from advances in technology, information, communications and ease of digital payments as well as improving logistics scenario. If all this translates into benefits for the consumer, the government should keep its hands off.