E-commerce: Don’t let protectionism drive policy

In yet another attempt to regulate and rein in digital platforms and e-commerce companies, the department of consumer affairs has proposed changes to the Consumer Protection (E-commerce) Act, 2019.

Though the focus has been on the impact of these laws on e-commerce retail firms, such as Amazon and Flipkart, the scope of the law is significantly broader and covers “all goods and services bought or sold over digital or electronic network”, which would apply to ride-hailing services, digital hotel and flight booking platforms, food delivery apps and many others.

The first issue to analyse is that of overlapping jurisdiction, which can create ambiguity and policy uncertainty. Many elements of the rules meant for consumer protection either have little relevance to consumers or are covered under different laws or even harm consumer interests, in some cases.

For instance, there is a clause stating that “No e-commerce entity which holds a dominant position in any market shall be allowed to abuse its position”, which falls under the ambit of the rules drafted under Competition Act, 2002, and under the purview of the Competition Commission of India. Similarly, there are rules about the use of consumer information, which should be covered under a data protection and privacy Act. Then, there are rules regarding vertical integration and the inventory model, which have previously been addressed by the commerce ministry and even foreign direct investment (FDI) rules.

The proposed amendments prohibit e-commerce entities from holding “flash sales”, which refer to sales at “significantly reduced prices, high discounts or any other such promotions or attractive offers for a predetermined period of time…”. The immediate point of concern is the subjectivity of the terms “significantly reduced prices”, “high discounts” and “attractive offers” – is a 10% discount significant, or is 40% considered a high discount?

More importantly, it is hard to imagine how prohibiting high discounts and attractive offers is supposed to protect consumer interests. It is easier, however, to imagine how this move can help the “offline” stores in their competition against the online ones.

The new rules also have direct protectionist provisions, which may have little bearing on consumers. E-commerce entities are directed to identify goods based on their country of origin and provide a filter mechanism for consumers to presumably search for only Indian goods.

The complex nature of integrated global value chains makes the country of origin a contentious issue that has led to tedious international trade disputes. To expect an e-commerce company to solve this issue and provide country of origin labels to millions of products listed on its website is a nearly impossible task.

To give a sample of the complexity, think of the country of origin label for a hypothetical mobile phone that is assembled in India, but has components manufactured in China for an American company?

The new rules also mandate e-commerce companies to provide a domestic alternative for any imported goods or services offered for sale. Consumer protection rules imposed on e-commerce firms should not be used for the atmanirbhar and swadeshi drive.

Perhaps the most contentious rule, which highlights a misunderstanding of how marketplaces work, is the “fallback liability” clause.

In short, this clause makes the e-commerce entity responsible for the goods and services sold by sellers registered on the platform. This is not dissimilar to holding a mall responsible for the products sold by individual retail shops within it. This is impractical and unfair to the marketplace.

Further, there is an array of rules that increase compliance requirements, such as registering with the department for promotion of industry and internal trade, mandatory partnering with the National Consumer Helpline, and the appointment of compliance officers. Every e-commerce platform must appoint a chief compliance officer (who will be liable for third party information on the platform), nodal contact person (to coordinate with law enforcement), and a grievance officer.

These compliance costs will undoubtedly be passed on to the consumers. The imposed liabilities and ambiguities present will require an army of lawyers to navigate through these rules. Smaller e-commerce platforms and new entrants would be disproportionately affected by these rules, thereby reducing competition and harming consumers again.

There are some aspects of the new rules which can be beneficial to consumers, such as the mandate on greater clarity on the sponsored listing of products and not manipulating search results to favour certain companies.

In the final analysis, though, these rules will fail the test of necessity and proportionality. Most e-commerce firms have fairly robust systems of customer care, which consumers can approach for grievance redressal. Further, e-commerce platforms facilitate refunds and returns in cases where customers are dissatisfied with the products. Beyond that, they have built a network where users rate and review both products and sellers of the products that can provide crucial information to any potential customers.

All of this is designed to minimise customer harm (which does not exist in offline brick-and-mortar stores) and competition between the e-commerce platforms will force them to strengthen these systems further. It is in their interest to minimise customer harm to maximise the chances of repeat customers.

Beyond these measures, an aggrieved customer still has the option to approach a consumer court, which the government can strive to strengthen and make it more accessible to consumers.

It would behove the government to withdraw most of these proposed rule changes, as the veneer of consumer protection peels away rather easily to reveal the underlying protectionist motivations.