India must understand which e-commerce policies can create uncertainty for firms as addressing them will help it reap benefits innovative technology companies bring

During Amazon’s second quarter earnings announcement recently, its Chief Financial Officer (CFO) Brian Olsavsky commented on India’s e-commerce policy and expressed the hope that the Government would provide a stable and predictable policy for the company to continue with its investments in technology and infrastructure. This demand is a new addition to the e-commerce debate and a novel one given that it is coming from a firm already heavily invested in India.

India must understand which policies in the e-commerce space can create uncertainty for companies, as addressing them will help the country reap the benefits innovative technology companies can bring to the table. Amazon services bring in jobs and investment to local economies globally and in India, along with innovation and knowledge that will help companies grow and improve productivity.

Amazon’s inauguration of its Hyderabad-based office, that is the single-largest till now globally, housing 15,000 employees across 1.8 million square feet of space, is proof that it considers India a viable business environment despite the regulatory hurdles faced in tariffs, taxes, stringent Foreign Direct Investment (FDI) norms and ever-changing data regulations.

Globally, site selection by large multinationals follows an intensive bidding process, with US states offering incentives to woo them. Last year, the firm narrowed down its Amazon HQ2 locations, choosing Northern Virginia over New York. There were a total of 238 bids for the site. Some states, most notably New Jersey and Maryland, offered multi-billion dollar incentive packages — $7 billion and $8.5 billion, respectively — to Amazon, but did not make it to the shortlist. After taking into consideration the existing availability of skilled workers, the infrastructure, cost of doing business and a stable business environment, the tipping factor which influenced the location decision was the pushback in the New York location, in contrast to a warm welcome from the community in Virginia, despite its moderate offer of $750 million in incentives.

Governments bid aggressively and offer incentives to attract successful multinationals as these firms generate economic activity through supporting and linked businesses, upskill workers and increase the uptake of more structured management practices, thus improving the overall productivity of local companies.

Recent research found that such million-dollar plants lead to significant increases in management, productivity and employment by the incumbent firm that boosts the local economy.

There is a stronger effect through companies which are in sectors where there are frequent flows in managerial labour from the plant’s industry, found by comparing incumbent firms in locations, which were the winners of the bidding process with the runners-up who narrowly missed being selected for the site.

Policy uncertainty deters companies from investing and hiring. When organisations are unclear about the future economic environment, they hold back on investing until policies become clear. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium-term, the increased volatility from the shock induces an overshoot in output, employment and productivity. Thus, uncertainty shocks generate short sharp recessions and recoveries.

All this affects long-term investments that are irreversible in nature and for which horizons for cost recovery can run into years. This would include innovation and research and development investments, ventures into new markets and infrastructure development. When there is a lack of stability and certainty in the future actions of the Government and regulators, enterprises hold back from investing in these dimensions. This, in turn, limits the impact of such firms that can come from long-term investments, including benefits to employment, wages and growth.

The role of economic and policy uncertainty at the macro-economic level has been measured globally and has recently been highlighted in the 2019 Economic Survey. An index is created by quantifying newspaper coverage of policy-related economic uncertainty mentions in the national newspapers, through combinations of keywords related to policy and uncertainty. This measure correlates strongly with stock market volatility measures, such as the India VIX Index. This measure is used globally to study the effects of events such as Brexit, the US-China trade wars and so on.

A less understood concept is that enterprises can also face uncertainty at sectoral, geographical and individual levels. Industry-level uncertainty can be measured through surveying firms sampled across sectors, asking them about expectations of future growth and costs at various horizons. Though this is harder to capture, it is amply clear that Amazon’s statement alludes to policy uncertainty in the e-commerce space.

Here are a few of the policies in the e-commerce space which increase uncertainty for businesses and thus deter investment: The draft National e-Commerce Policy rules earlier this year, preventing companies from influencing prices or selling products in which they hold stakes, disrupted business plans for e-commerce firms. It pushed firms back to the drawing board to ensure they can comply with the current regulations while limiting losses that arose from lack of clear direction from the start. The final e-commerce policy has been held back for another year, putting the investments of businesses in this sector in jeopardy during the interim months.

The recent recommendation by a high-level Government panel to do away with the need for foreign firms to store a copy of all personal non-critical data in India will help companies, though the decision on data localisation remains to be made.

Under data localisation, foreign companies would need to redesign internal algorithms to access data locally, pay up for new servers and face costs to protect data in less-secure environments. There is also uncertainty as to what constitutes non-critical data and how it would interact and overlap with critical data. E-commerce companies still face policy uncertainty while the due process of discussions with various Government bodies and stakeholders regarding data localisation is completed. We soon expect to hear from the Prime Minister’s Office on data localisation. The announcements, though not final, do offer direction and some insights into the Government’s thought process.

A related issue is the disclosure requirement of source code under the draft e-commerce policy. Amazon depends highly on data-driven marketing and heavy use of its item-to-item collaborative filtering algorithm for customer recommendations.

A code submission requirement is a coercive technique aimed at achieving the transfer of technology and local needs. Technology transfers happen in an organic and legitimate manner through managers and employees developing skills and passing them onwards in data communities or by moving across companies. Whether this will come into effect through the final e-commerce policy will remain unresolved till mid-2020.

Multiple guidelines can also cause delays in the resolution of uncertainty. The RBI’s Report of the Working Group on FinTech and Digital Banking includes e-aggregators, Robo advisers and Big Data all under FinTech. E-commerce firms, which are data-intensive and provide multiple services, will be included under this description. The Ministry of Finance FinTech Steering Committee report remains pending that will recommend another set of guidelines on regulation around technology-enabled activities in India.

For India to reap benefits from global multinationals such as Amazon, we need to provide companies exactly what they are asking for — a stable and predictable policy environment that can foster investment and infrastructure development.

Early investments from large innovative companies will give a head start to India, enabling it to pick up technologies from global leaders and push domestic innovation forward faster as well. This is critical for a capital-scarce country like India, which is aspiring to become a $5 trillion economy in the next five years.

(The writer is faculty, ISI Delhi and Fellow at the Esya Centre)