Curbs recently introduced by India on e-commerce companies could cut online sales by $46 billion by 2022, a PwC draft analysis finds.

India’s new foreign investment restrictions for its e-commerce sector, which includes giants such as Amazon.com and Walmart-owned Flipkart, could reduce online sales by $46 billion by 2022, according to a draft analysis from global consultants PwC seen by Reuters.

Under the changes, e-commerce firms in India will from Feb. 1 not be able to sell products via companies in which they have an equity interest or push sellers to sell exclusively on their platforms.

Announced in December 2018, just months before a general election due by May this year, the rules were seen as an attempt by Prime Minister Narendra Modi’s government to appease millions of small traders and shopkeepers, who form a key voter base and say their businesses have been threatened by global online retailers.

Industry sources told Reuters the policy would delay or derail some investment plans and push companies such as Amazon and Flipkart to create new, more complex business structures.

In a private analysis PwC conducted based on estimates provided by the industry and using publicly available information, it forecast that online retail sales growth, tax collections and job creation would be severely hit if companies changed their business models to comply with the new policy.

The draft analysis has not been made public. PwC India, in response to Reuters’ questions, says it “does not endorse any of these assumptions or conclusions, nor have we conducted any independent study on this”.

“As a matter of policy, we do not comment on company-specific issues,” PwC says.

The analysis produced by PwC showed that the gross merchandise value of goods sold online could reduce by $800 million from expectations in the current fiscal year that ends in March, a document seen by Reuters showed. Then, the sales would dip drastically below previous forecasts, lopping off $45.2 billion in the next three years, the data showed.

To be sure, sales would still be growing, but at a less robust rate than envisaged before the policy change.

Online retailers often use gross merchandise value, or GMV, based on monthly online sales as a measurement of performance, as they typically make revenue from the commissions they get from sellers.

The analysis also said that by March 2022 the Indian policy could lead to the creation of 1.1 million fewer jobs than may have been previously expected and lead to a reduction in taxes collected of $6 billion.

Amazon and Flipkart have both sought an extension of the Feb. 1 deadline, but a source at India’s commerce ministry told Reuters the government was unlikely to agree.

Amazon says in a statement it remains “committed to be compliant to all local laws” but has asked the government for an extension of four months.

Flipkart has sought a six-month extension, a source said. Though the company did not respond to Reuters questions, it told India’s Economic Times newspaper that it believed “an extension is appropriate” to ensure that all elements of the policy were clarified.

POLICY SETBACK

The e-commerce investment policy is the latest flashpoint between India and U.S. multinationals. U.S. companies have in the past two years protested against a wide array of regulations - from policies calling on tech companies to store more data locally to those capping prices of imported medical devices.

Morgan Stanley had estimated, before the latest government move, that India’s e-commerce market would grow 30 percent a year to $200 billion in the 10 years up to 2027. With rising use of the Internet and smartphones in India, online retailers have doled out discounts to lure people to shop online for everything from basic groceries to large electronic devices.

The new policy, which followed intense lobbying by groups representing millions of India’s small traders and shopkeepers, was aimed to prevent such deep discounting by big online retailers.

Trader groups had alleged that online firms used their control over inventory from their affiliates, and through exclusive sales agreements, to create an unfair marketplace that allowed them to sell some products at lower prices. Such arrangements would be barred under the new policy.

Amazon has committed to investing $5.5 billion in India, while Walmart last year spent $16 billion to acquire Flipkart.

“After one of the biggest foreign investments by Walmart, the government has again blindsided foreign investors,” says Pratibha Jain, a partner at Nishith Desai Associates, which advises e-commerce companies, adding that such policy moves made India “a difficult place to do business”.

India’s commerce minister, Suresh Prabhu, says the e-commerce policy was “very clear”, though the government was open to hearing views of companies.

“We would like to assure all foreign investors and domestic investors we will have a stable, clear policy,” Prabhu told ET Now news channel.

NEW RULES

Under the new rules, e-commerce companies can make bulk purchases through their wholesale units or other group companies that in turn sell the products to select sellers, such as their affiliates or other companies with which they have agreements.

Those sellers can then sell the products to other companies or direct to consumers, often at attractively low prices.

The new regulations follow complaints from Indian retailers and traders, who say the giant e-commerce companies are using their control over inventory from their affiliates, and through exclusive sales agreements, to create an unfair marketplace that allows them to sell some products at very low prices.

The All India Online Vendors Association (AIOVA) in October filed a petition with the anti-trust body Competition Commission of India (CCI) alleging that Amazon favours merchants that it partly owns, such as Cloudtail and Appario. The lobby group filed a similar petition against Flipkart in May, alleging violation of competition rules through preferential treatment for select sellers.

The government notification also said that the cash back that customers get as an incentive while online shopping should not be based on whether the product was purchased from an affiliate of the platform or not.

The new rules said that services provided to vendors on an e-commerce platform and by that entity’s affiliates should be done so at arm’s length and in a fair and non-discriminatory manner.

New rules will appease small traders and farmers who fear that U.S. companies are making a backdoor entry into India’s retail market and could squeeze out small corner shops that dominate Indian retailing.

The Confederation of All India Traders (CAIT) in a statement said that if the order is implemented in full then malpractices, predatory pricing policies and deep discounting by e-commerce players will no longer occur.

CAIT secretary general Praveen Khandelwal said the new rules will put an embargo on the tactics adopted by the global players to control and dominate retail trade in India through e-commerce.

In May 2018, CAIT had raised objections to Walmart’s $16 billion acquisition of Flipkart saying the deal would create unfair competition and result in predatory pricing.

The new regulations build on existing rules under which foreign investors can acquire 100 percent of e-commerce companies, with the exception of a model based on inventory from which they are barred.

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