Now it's time for Silicon Valley to profit from the new Indian ecommerce laws it helped shape
Late last month, the tech industry cheered two huge back-to-back investments into India’s fledgling e-commerce sector: India e-tailer Flipkart.com raised $1 billion from global venture capital firms, the largest venture investment ever into an Indian Internet company, and 2014’s second largest investment round after Uber. Less than 24 hours later, Jeff Bezos one-upped Flipkart by announcing that Amazon would invest $2 billion into building up Amazon.in’s operations, the largest investment to date by an e-commerce company in India.
The numbers are impressive, and to the uninitiated, these latest multibillion dollar e-investment announcements in India might read like Silicon Valley Triumphalism —confirmation of the New Economy’s inexorable march forward, whether Luddite dead-enders like it or not.
For months now, Pando has been reporting on the merging of political interests between India’s newly-elected ultranationalist leader, Narendra Modi, and Silicon Valley heavyweights, led by eBay billionaire Pierre Omidyar, pushing to enter India’s closed and largely undeveloped e-commerce sector. Earlier this summer, Pando reported on Modi’s plans to open up India’s e-commerce sector to foreign direct investment (FDI) as one of his first major policy moves, with representatives from eBay/PayPal, Amazon and Google working hand-in-glove with Modi’s new government in drawing up those plans.
The US State Department had placed Modi on a visa blacklist from 2005 until his election this year, over his role in the brutal anti-Muslim pogroms in 2002, which left some 2000 Muslims murdered, and hundreds of thousands internally displaced.
Among Silicon Valley’s e-commerce giants, none has purused a more overtly political strategy to break into India’s massive undeveloped market than Omidyar. In 2009, Omidyar’s top local lieutenant, Jayant Sinha, set up Omidyar Network India Advisors, where he served as managing director and partner until February 2014, when Sinha stepped down to work as an advisor in Modi’s campaign and to run for a seat in parliament on Modi’s ultranationalist coattails. Within weeks after Sinha joined Modi’s campaign, Modi gave a surprise speech embracing foreign direct investment in India’s e-retail sector, a 180-degree reversal from the BJP Party’s previous position, but perfectly in line with Sinha’s statements, Omidyar’s interests, and eBay’s investment strategy.
As Pando reported, Omidyar Network's top India lieutenant, Jayant Sinha, had been covertly working to help elect Modi since 2012, even as Sinha was publicly doling out millions in Omidyar's "charity" funds. During this same time, Omidyar's managing director also quietly served as a director in the India Foundation, a powerful BJP Party think-tank that was the "brainchild" of Modi’s top intelligence official, Ajat Doval.
Omidyar's direct involvement in opposition politics in India — which got him in trouble in 2012 when the ruling center-left government accused Omidyar Network and the Ford Foundation of illegally lobbying parliament to allow FDI in e-retail — stands as one of the most brazen examples of Silicon Valley strategically meddling in a sovereign nation’s politics. While the effort in 2012 failed under a cloud of suspicion, this year, Big Tech's investments in Modi appear poised for a huge payoff.
The political shift coincided neatly with eBay’s huge $134 million investment earlier this year into Flipkart’s biggest local competitor, Snapdeal — which is more of a marketplace platform for third party e-retail, rather than an inventory-based e-tailer like Flipkart or Amazon.
As Modi’s election victory neared in May, more tech companies and VC funds poured in — including another $100 million for Snapdeal from investors like Blackrock and Temasek Holdings, Singapore's sovereign wealth fund — culminating with Flipkart’s recent $1 billion raising, and Amazon.com’s $2 billion commitment to India.
The potential growth for e-commerce is almost unlimited, given how small it currently is in a country with a population of 1.2 billion people. Today, India's online retail is estimated at well under 1% of the $500 billion total in retail sales, but use is skyrocketing, and it's estimated India will in due time become the world's third largest e-commerce market after the US and China. Today, India has an estimated 250 million Internet users, but this number is set to explode as India expects 500 million smartphone users on the Internet by 2020.
But it's important to understand what's happening in India's e-commerce sector as something much more than mere tech industry investments. The real story here is the high-stakes politics of e-commerce, and its power to massively disrupt and reshuffle the political demographics of the world's largest democracy. Indeed the Obama Administration has been pressuring India hard to open up its e-commerce to foreign direct investment — failing with the previous government, but apparently succeeding with Modi.
If Big Tech’s multi-billion dollar bet on Modi is right, it could mean profound changes in India’s political economy – a risky bet that, if it goes bad, could redefine just how catastrophic “disruption” can be.
In late 2012, at the peak of India’s last major political fight over FDI in India’s e-retail, India’s Businessworld magazine published an amazing investigative report that reads at times like the great black comedy exposé’s in the Russian press in the 1990s, before Yeltsin’s oligarchs quashed Russia’s independent media.
Businessworld’s reporters spent four months on their investigation; their report was published just days after the left-leaning Congress government (re)stated its unequivocal position: FDI in multi-brand e-commerce was still against Indian law. Period. What that meant in practice is that no foreign-backed Indian e-commerce company can function both as a B2B wholesaler; and as a B2C, taking orders online from customers and moving those goods to customers.
And that included Flipkart, whose foreign investors include Accel Partners, Tiger Global, Morgan Stanley and DSK Global. Flipkart could only legally operate as a B2B wholesaler: If you bought your goods on Flipkart’s platform, the company conducted a separate transaction with retailer WS Retail, which delivered the goods to the customer. Legally, the two firms — Flipkart and WS Retail — had to be completely separate entities: separate managers, separate directors, separate companies.
But when Businessworld’s reporters went looking for WS Retail’s director, Tapas Rudrapatna, in WS Retail’s registered office in Bangalore, they came to “a small, sleepy house with two gatekeepers on duty and some delivery boys wearing ‘Flipkart’ T-shirts.” The article describes what happens next:
“Nobody knows who Rudrapatna is. After a few calls, the guards direct us to a newly opened Flipkart office 5-7 km away. At the entrance, flipkart.com’s logo is displayed; at the reception there hangs a board of FOS [Flipkart Online Singapore, the entity into which foreign funds invest into Flipkart—M.A.]. An HR executive arrives after a 30-minute wait. She confirms that Rudrapatna works for Flipkart from this office, but the man himself refuses to turn up. We leave our visiting card for Rudrapatna with a request for a call-back, which never happens.”It turns out that WS Retail was founded by the same two founders of Flipkart — Sachin Bansal and Binny Bansal (not related, despite sharing the same last name). Then they "sold" their shares in the B2C, WS Retail, to two new owners, including one named B.K. Bansal.
Businessworld called on B.K. Bansal, who raised suspicions by sharing the same last name as Flipkart’s founders and CEOs. Their suspicions turned out to be justified: the reporters headed to B.K. Bansal’s hometown 2000 km north of WS Retail's headquarters in Bangalore, where they discovered that WS Retail’s 50% owner and board member B.K. Bansal was the uncle of Flipkart co-founder Sachin Bansal. In their brief interview, Uncle Bansal admitted to Businessworld that he knew zilch about the company he allegedly half-owned:
“Bansal, who told us that he was Sachin Bansal’s paternal uncle, informs us that even though he is on the board, he hardly knows anything about the business and everything is handled by Sachin. ‘Sachin’s business has expanded very fast, so he had to create another company,’ says Bansal.”In a panic, Sachal Bansal, Flipkart’s much celebrated co-founder and CEO, called Businessworld asking them to hold off reporting their findings until he had a chance to meet them. But Sachal canceled the meeting, sending instead Flipkart’s CFO, who told the reporters:
“As per the current FDI framework, Flipkart and WS Retail are not related. Flipkart operates in complete compliance within the scope of the FDI rules.”And yet, as Businessworld reported, the foreign-held e-tailers often co-mingled their B2B and B2C offices and real estate. In one Flipkart warehouse in New Delhi, inside its 64,000 square foot premises, was “a small entrance” leading to a “1000 sq. ft room, which, according to the warehouse manager, is under WS Retail. It is mostly used to send products for delivery.”
They found similar corporate duplicity at Snapdeal, Flipkart’s biggest e-tail rival, which has received some $160 million in funding from eBay, and tens of millions more from global giants like Blackstone. Snapdeal was co-founded by a Wharton grad named Kunal Bahl and his partner, Rohit Bansal. By a strange coincidence, Snapdeal’s B2C “consumer face” — Spinel Tradecom — was also co-founded by Snapdeal’s co-founders, Kunal Bahl and Rohit Bansal; and Spinel Tradecom was initially registered to Kunal Bahl’s home address, where Snapdeal was also initially registered. As with Flipkart and WS Retail, Snapdeal’s founders handed their shares in their B2C, Spinel Tradecom, to their relatives, according to Businessworld’s investigation; and like Flipkart, Snapdeal shared office and warehouse space with its B2C, Spinel Tradecom.
The Rocket Internet-backed e-tailer Jabong was also found to be comingling its B2B with B2C in the same warehouse.
Businessworld concluded its investigation with an ominous warning:
“Given that e-tailers’ B2B and B2C entities are so intertwined, claims that they comply with FDI rules sound hollow. If and when the government gets to lifting the corporate veil, e-tailers will find it tough to defend themselves.”The other possibility not foreseen by Businessworld: The election of Narendra Modi, and a decision to make Indian ecommerce wide open to foreign direct investment.
Ecommerce: Risky Business
A lot of Silicon Valley readers might be rolling their eyes reading these stories of corporate hijinx and legal evasions in the nascent e-commerce sector —ascribing it all to India’s venal bureaucracy, or to India’s change-resistant culture that “just doesn’t get it.”
There certainly is bureaucratic corruption in India, and yes, they do have an old culture. That aside, Indians in the public and private sector have given a lot of serious thought over the past few years to FDI in e-commerce, and what effect that would have on India’s economy and politics. Under the previous Congress-led center-left government, there was much heated debate over the pros and cons of opening up India’s e-commerce sector to foreigners.
A report issued in 2012 by the Commerce Ministry department overseeing foreign investment and market liberalization reforms spelled out a list of pros and cons in opening up e-commerce to FDI, and the cons clearly outweighed the pros [hat-tip to Aditya Velivelli]. The long and short of it: E-commerce is so disruptive and so prone to centralizing and monopolizing power in the retail sector, and foreign e-commerce players are so much more powerful than India’s, that allowing FDI into e-commerce could very well result in a catastrophic disruption and loss for India’s retailers, suppliers and producers, and result in India losing sovereign control over key sectors of its political economy.
The pros we all pretty much know by now (increased efficiency, transparency, spurring new investment, etc). But the arguments against — which the media these days rarely gives serious consideration to — reveal the high-stakes politics of foreign e-commerce. Among the Commerce Ministry department's reasons against allowing FDI in India’s e-commerce:
* Because of scale of economic operations, e-commerce players in the inventory based model will have more bargaining power than standalone traders and will resort to predatory pricing.
- The infrastructure created by major e-commerce players will be captive and government will not be able to achieve its objective of creating back end infrastructure.
- Indian e-commerce market is at a nascent stage of development. With FDI in e-commerce, global players will have adverse impact on this domestic industry. It will lead to monopolies in e- commerce, manufacturing, logistics and retail sector.
- Inventory based e-commerce competes directly with MSMEs [Medium-Sized Manufacturing Enterprises]. Indian e-commerce B2C is growing in an eco-system with Indian owned/led companies offering open marketplace models which provide a technology platform to help MSME reach across India and even globally. These marketplaces do not compete with MSME or retailers and allow everyone to trade. On the other hand, allowing the entry of inventory based large foreign e-tailers may shrink Indian entrepreneurship and the MSME sector.
- MNCs [Multi-National Corporations] may dump their cheaper products in the market causing a negative impact on the Indian manufacturing sector in general and to MSMEs in particular.
- Small time businesses/ kirana stores remain the largest source of employment in the country. Opening of B2C e-commerce on inventory based model is likely to seriously impact these shopkeepers leading to large scale unemployment. The Commerce Ministry report, issued by its Department of Industrial Policy & Promotion (DICC), shows a clear-eyed and sophisticated understanding of the risks around e-commerce, particularly its ability to rapidly centralize and monopolize power over large sectors of the economy.
Their concerns echo the same problems raised by American economists like Barry Lynn, who dissected modern monopoly power and politics in his book “Cornered”. Although Lynn focused much more of his book on the political power that multi-brand retail monopoly Wal-Mart exerts over producers, manufacturers, retailers and ordinary consumers, he warned that e-commerce monopoly power operates on a whole different scale and speed from even a Wal-Mart:
“commerce on the Internet tends to collapse into near monopoly even faster than commerce in the real world. Precisely because the Internet eliminates the ‘tyranny’ of locality, it eliminates most of the physical obstacles to centralization, such as the price of real estate. The result is consolidation beyond anything we have ever seen in the physical world, often in the form of a single superdominant entity — Netflix, Amazon, iTunes — that also tends to enjoy real cost advantages over real-world rivals.”Nobel Prize economist Joseph Stiglitz, in an interview in 2012 with the Indian magazine Outlook, offered much the same concern about Wal-Mart’s potentially catastrophic effect on India’s supply chain. After wondering aloud “why India needs foreign entrepreneurs in any sector, particularly the retail or the financial sectors” given India’s “talented” and “large entrepreneurial class,” Stiglitz observed:
“To me, as most economists say, a little competition is good. On the other hand, the worry is that a company like Walmart may owe some of their success to its power and ability to drive down prices. Because they can buy things out and if that’s the case then they will use that power to have Chinese goods displace Indian goods. The real harm will not be to the retail sector. That is not the real problem. The harm will be to the Indian supply chain going into the retail sector.”The dangers of corporate monopoly power has traditionally been a major concern for Americans, going back to the colonists’ Boston Tea Party rebellion against the British East India Company. But whatever problems the early Americans had under the East India Company’s power, it doesn’t compare to what India suffered under the world’s most rapacious multinational company. For roughly a century, from the mid-1700s until 1858, India was ruled by the privately-owned East India Company, with catastrophic results: artificial famines that killed untold millions, and brutal suppressions of native rebellions, culminating in the Indian Rebellion of 1857, after which control over India was passed on to the British Crown.
Things were if anything worse under the Raj, during the peak of Britain’s global laissez-faire system of trade: horrific famines in the 1870s and 1890s took tens of millions more lives in India, even as the British overlords oversaw record exports of grains out of India’s ports. The last famine under British rule, in 1943, killed some four million Indians in Bengal.
So you can understand why Indians would have a less romantic, more sober grasp of the potential for foreign-owned e-commerce to create mega-powerful foreign-dominated monopolies able to exert political control over India's politics, production and people's lives. The experience under foreign domination, and under foreign corporate monopoly power, have informed India’s politics ever since independence. India’s constitution promises socialism and economic justice. The preamble begins:
WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:
JUSTICE, social, economic and political... The long-dominant Congress Party is no longer the socialist party it began as — Congress-led governments were the first to introduce neoliberal reforms in the 1990s. Nevertheless under Congress’ left-neoliberal programs, the number of Indians living in “extreme poverty” fell from 60% of the population in 1981, to 33% in 2010, according to a World Bank report. Another study last year by India’s Planning Commission showed that poverty fell from 37.2% in 2004-5 to 22% in 2011-12, all under Congress-led rule.
A Political Animal
Which raises the obvious question: Why would Modi, an ultranationalist — whose BJP Party allies have made a lot of noise in the past about setting fire to Walmarts — why would he risk disrupting and destroying India’s vital retail sector and supply chain, and the hugely important SME and MSME sectors?
Obviously Modi isn't contemplating this merely to please his Omidyar Network advisor, Jayant Sinha. Modi is a political animal, and one of the most remarkable and successful political animals in the subcontinent in years. Modi is not looking to merely grease a few palms, do a few favors, and retire to a cushy Harvard sinecure or a Clinton Foundation seat like many squishier neoliberals from the developing world. If the last few decades of Modi-level neoliberals is any guide, he’s looking to completely transform the political economy of India in such a way as to make the BJP Party and his pro-business authoritarianism the culture’s new default setting — displacing at last the Congress Party and its socialist assumptions with a new politics that favors Modinomics. Think Thatcher, Reagan, Pinochet, and how they permanently transformed their countries’ political economies.
In this sense, the disruptive powers of Silicon Valley e-commerce could be one of Modi’s most effective political weapons. If he follows through with his first promises since taking power — opening up FDI into e-commerce, gutting labor laws, opening India to foreign insurance giants and thereby allowing huge outflows of capital — Modi would be remaking India’s political economy in such a way as to weaken traditional bases of Congress’ socialist-minded support, and helping empower a new class deeply invested in Modinomics. So while manufacturing, retail, and domestic investment might suffer, those hurt most would be from the traditional base for the Congress Party and its left allies; while the same socioeconomic transformation would boost the wealth and power of those who already back Modi’s ultranationalist BJP party, and create newer classes of winners who would owe their fortunes to Modinomics and the BJP: India’s booming tech sector, its entrepreneurial class, its financial class, the winners in the new retail sector, and of course India’s wealthy, whose billionaires overwhelmingly support Modi.
Modi already proved this year that an effective combination of sectarian ultranationalism and political-economic disruption can work to his party’s advantage. In India’s most populous state, Uttar Pradesh (200 million), Modi sent his most trusted and controversial aide — Amit Shah, charged with murder while serving under Modi in the state of Gujarat — to perform a political miracle. The BJP Party had been routinely trounced in Uttar Pradesh elections, where lower-caste Hindus and Muslims have traditionally allied as a voting bloc along class-caste lines. In the previous election, BJP won only 10 out of 80 seats.
Shortly after Modi sent Amit Shah into Uttar Pradesh in 2013, communal violence between Hindus and minority Muslims swept the state, leaving dozens dead, mostly Muslims. Shah came under immediate suspicion from India’s equivalent to the FBI, but the damage was done. Lower-caste Hindus and Muslims were at each other’s throats, resulting in a BJP landslide in Uttar Pradesh, taking 71 of 80 seats in this year’s election. As the New York Times reported,
“Mr. Modi won a huge majority in the electorally critical state of Uttar Pradesh, in part because of deadly riots last year that broke a traditional voting alliance between low-caste Hindus and Muslims.”For his service, Modi appointed accused murderer Amit Shah as the new president of the ruling BJP Party.
Seen in this political light, in terms of Modi’s cold political calculus, the question over whether or not it’s “right” for Modi to bring in representatives from eBay, Amazon and Google to rewrite his country’s e-commerce laws is much less an academic debate about abstractions like progress versus tradition, and much more about the brutal realities of politics. And in this case, Silicon Valley’s interests — expanding into one of the great last undeveloped markets in e-commerce, with a population of 1.2 billion people and enormous growth potential — align neatly with Modi’s political objectives, to transform India’s political economy ecosystem in such a way that its vestigial socialism is buried forever, and the BJP dominates whether in power or out.
(Special thanks to Aditya Velivelli for helping educate me about India’s complex politics and social fabric, and for his invaluable research into India's political economy—M.A.)