Shopping For Inequity

The government's policy on FDI in e-commerce is designed to protect the welfare of a smaller political constituency…

India's exuberant e-commerce industry was recently hit by a known unknown, or an existing risk that had been left unattended. Delivery boys associated with two or three companies stopped working, demanding better working conditions — such as toilets in offices or a motorcycle maintenance allowance — and better pay.

This not only led to a predictable pile-up of delivery packages but also focused attention on an industry that's in news for conflicting reasons: soaring valuations and rapidly multiplying wealth of the founders counteracted by absence of regulatory oversight leading to dodgy governance structures and business practices.

What's interesting is that the strike — the delivery boys were organised under the banner of Raj Thackeray's Maharashtra Navnirman Sena banner — came soon after government officials finished separate consultations with industry representatives and state governments on whether to revise the existing rules on foreign direct investment (FDI) in e-commerce. The government was, of course, nudged into this stakeholder consultation process by the Delhi High Court. The states are expected to submit their views to the Centre soon. 

There is no evidence to suggest that the strike was related to, or timed to coincide with, the government's rounding up of opinions on retail FDI. But, given the close procession of events, it does pivot public gaze towards the government's anomalous policy on FDI in retail, as well as the familiar national malady of regulatory processes lagging industry development.

The government's policy on FDI in retail, like previous episodes of politically-driven policy-making, is designed to protect the welfare of a smaller political constituency over furthering the welfare of the general public, a much larger but dispersed political constituency. It has also spawned a convoluted business strategy designed to side-step regulatory barriers. Here's how.

The government's FDI policy in the retail sector is divided into four parts — single brand retail, multi-brand retail, cash-and-carry operations and e-commerce. Single-brand retail and cash-and-carry operations allow 100% FDI, though the investment freedom is circumscribed by conditions which encourage evasive action — such as, a procurement stipulation requiring compulsorily sourcing of 30% stock from Indian suppliers, or the numerous approvals mandated in the policy.

In multi-brand retail, only 51% FDI is allowed. Policy here is weighed down by formidable conditions, which seem to have been designed to deter rather than encourage investments. Provisos include a minimum investment of $100million, 50% of the investment has to be mandatorily invested in "back-end" infrastructure (defined in the policy document as "investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc"), obligatory 30% procurement conditions, geographical and locational restrictions.

Finally there is e-commerce, where 100% FDI is allowed only for business-to-business trade, but not for business-to-consumer. Even 51% investors in multi-brand retail are barred from indulging in e-commerce. Conversely, anybody with an e-commerce business in India cannot access any FDI. Despite these restrictions, Indian e-commerce businesses have employed ingenious subterfuge to absorb copious amounts of FDI. 

The device is simple: they have created what is known as the "marketplace" model under which e-commerce sites use technology to drive a transaction platform that matches buyers and sellers. These sites, therefore, are only technology platforms and not necessarily, or technically, e-commerce sites selling to retail customers. This is slightly disingenuous: it allows e-commerce promoters to invite large sums of foreign capital while carrying on the business of multi-brand retail through the internet. 

The marketplace model is in contrast to the "inventory" model under which the e-commerce promoter buys all the goods, stocks them and then eventually sells them to the retail customer. There are obvious costs involved in this business structure, making it disadvantageous when compared with the marketplace model.

What's bizarre is that the government's policy architecture has been directly responsible for spawning this perplexing workaround. The desire to protect a vocal political constituency — the traditional corner shops — has forced the government to create artificial divisions in the retail trade (between single-brand and multi-brand) and simultaneously lump two markedly distinctive trade practices (multi-brand and e-commerce) into the same category. The resultant confusion and marketplace distortion is now all too visible.

This skewed policy framework has another direct outcome — regulatory gaps. It is indeed ironic that despite a vocal policy environment — dominated by the strident and misguided debate on FDI — a regulatory structure for safeguarding consumer rights in e-commerce has been delegated to the sidelines. Stories about leading e-commerce companies disregarding consumer fulfillment promises with impunity have been rising due to lack of a regulatory structure. 

It is now self-evident that the executive has to sort out the knotted strands of retail FDI policy before the judiciary steps in — as has happened in many other cases — and genuine e-commerce becomes a casualty of the egregious policy tangle. Unfortunately, public policy history in India is replete with stories of how the need to gratify niche vote-banks has eclipsed decisions that could benefit public at large. This government now has an electoral imprimatur to correct this historical aberration.

Published originally in Outlook Magazine: http://www.outlookindia.com/article/shopping-for-inequity/295108

Busting Myths Around Raghuram Rajan's RBI

There is no definitive proof that lower interest rates will lead unquestionably to higher economic growth.

The revised Indian Financial Code, put in the public domain by Finance Ministry, has divided economists, observers and experts into two distinct, sharply-delineated camps. On one side are those who are desperate to clip the Reserve Bank governor’s wings, and on the other are those who want his unspoken, uncovenanted autonomy to remain untouched, uncompromised. 

In the midst of this brouhaha, discussions about reforming the central bank’s governance framework has fallen through the cracks. While the debate about reducing the Governor’s powers rages endlessly, there is little attention being paid to what happens even after the change is effected. The Governor will still be answerable only to Finance Minister, and not to Parliament or a select committee of Parliament, as is the practice in many countries and as it should be in India too. It is surprising that this aspect of central bank reforms has failed to merit any discussion.

The revised code, among other things, has suggested that monetary policy, the exclusive preserve of central banks all over the world, should be decided by a monetary policy committee. Today, the final decision vests with the governor who, after consulting multiple bodies and committees, then has the sole discretionary power to take any monetary action. It is the composition of this recommended committee that has got people worked up. According to the revised code, the committee should have the RBI governor in the chair, two more RBI employees and four “persons appointed by the Central Governor”. Moreover, each member will have one vote and decisions will be taken on the basis of majority vote. 

With four votes, the government’s nominees immediately constitute a majority. Even more sinister is Article 257 in the code, which enjoins the Central government to nominate one representative to the meeting. This representative will not have a vote but will participate in the committee’s deliberations and will read out a statement from the government at the meeting. The import of this is not lost: with a representative watching the proceedings and delivering the central government’s message at the meeting, will any government nominee dare go against New Delhi’s wishes?

Arguments have been made that, in a democracy, the executive should have some say over a critical economic function like monetary policy. There is a basic flaw with this argument; separation of powers is a fundamental tenet of democracy, especially where the government’s actions can have an abiding impact on people’s lives. The inflationary stickiness arising from the 2008-09 stimulus programme is still haunting the Indian economy. Unlike the thick, Constitutional boundary separating the legislature from the judiciary, the line segregating the executive and the central bank is thin and rooted more in convention and common economic sense. 

It has become fashionable for economists of a certain orientation to demand reduced powers for the central bank governor. There are a couple of problems with that. First, under the new contract signed between RBI and the government, RBI is responsible for ensuring that consumer inflation remains within a pre-determined band. If the Governor ’s powers to use monetary tools to achieve that objective are taken away, then it somehow nullifies the inflation contract.

Second, the Indian economy has always been marked by fiscal dominance, which has been cogently explained by Niranjan Rajadhyaksha (http://goo.gl/3uwpz4) in his column for newspaper Mint. In simple words, monetary policy in India has always followed fiscal policy. The government’s fiscal policy, resulting in fiscal deficits, has forced the central bank to fashion monetary policy with the objective of tackling the after-effects of fiscal excesses. The RBI has worked hard over the past 25 years to minimise the deleterious impact of government’s profligacy on monetary policy. The government, in seeking to control both fiscal and monetary policies now, will negate all that has been achieved in stabilising the economy.

At the heart of the demand to shift the reins of monetary policy is a popular myth: reducing interest rates will automatically stimulate economic growth. Like all myths, especially those relating to flying machines of antiquity, there is no definitive scientific — or statistical — proof that lower interest rates will lead unquestionably to higher economic growth. Interestingly, another prevalent myth about the Indian economy being “decoupled” from the global economy evaporated quite rapidly after 2009. 

Many economists and industry lobbies have been incensed by RBI’s refusal to lower interest rates. Former RBI governor D Subbarao raised interest rates 13 times in quick succession. It was hoped his successor, Raghuram Rajan, would be divorced from such “anti-growth” orthodoxies. And, even though he has lowered interest rates, the pace has not been found too satisfactory. 

Beyond myths, a softer interest rate regime definitely has some side benefits: lower interest rates will automatically reduce the debt servicing burden of many large corporates which have borrowed way beyond their digestive capacities. While the RBI has been critical about the mounting levels of sticky loans in bank books and the behavioural patterns displayed by corporate borrowers, the government believes the investment cycle — especially “Make In India” — will not revive unless this staggering debt mass is sorted out.

Finally, the revised code employs some rather curious appellations: for example, it keeps referring to the RBI governor as “chairperson”. For example, Article 256(2)(a) says the monetary policy committee will comprise “the Reserve Bank Chairperson as its chairperson”. Last time I checked, RBI had no chairperson. He doesn’t exist even in the RBI Act.

Courtesy Outlook magazine: http://goo.gl/V1IALu