January 2019

This month, the Indian news media focused on several political and regulatory developments in the country.  News sources weighed in on the Government’s decision to introduce a new bill on affirmative action, the tightening regulations around FDI in India’s e-commerce sector and a minimum income scheme proposed by the Congress Party.


Tighter Regulations for E-commerce Companies

The Indian government introduced new regulations to block existing loopholes in India’s FDI policy for the e-commerce industry.  The regulations tighten norms to prohibit e-commerce marketplaces from directly competing with local sellers.  Media reports weighed in on the implications of the new regulations on the sector.

A columnist for Livemint highlighted that the new regulations would disrupt the existing eco-system, but would also plug key systemic loopholes.  “The e-commerce policy is explicitly clear that marketplaces cannot be sellers and are prohibited from owning or controlling any inventory… The recent policy updates will disrupt the existing structures created by some marketplaces in two ways.  First, the sellers that have equity ownership by the marketplace or its group companies will no longer be able to sell on the marketplace.  Second, sellers will no longer be able to source more than 25% of their purchase from the marketplace or its group companies.  This will prohibit marketplaces from making attempts to project inventory operations as independent sellers.  It will also restrict the creation of private labels by marketplaces to cordon off high-volume, high-margin areas for themselves…  The third significant impact is the restriction on marketplaces to insist on exclusive deals.  The use of money and reach to crowd out small sellers has been a very destructive strategy that strikes at the core of fair competition.  With exclusive deals now gone, more sellers can offer the same product, which is good for both buyers and brands.  The cumulative effect of this will be faster growth for independent online sellers.  This will create a deeper selection on pure marketplaces, greater choice for online buyers, more competition among sellers, and better prices for consumers.”

An article on MoneyControl commented on the damage to the retail sector by FDI-backed e-commerce players and called for more support for local businesses.  “In the past decade, selling smartphones emerged as the single largest new opportunity for Indian shop owners.  It is a business ideal for small shops – requires minimal space, infrastructure and investment as brands invest heavily in creating the demand pull… Marketplaces pursued this opportunity so aggressively that now more than 50 percent of their sales come from selling smartphones.  These e-commerce retailers used their foreign deep pockets to corner the market by substantially subsidising almost every sale of smartphone.  Being a low margin business, the small shop owner is rarely left with anything to discount it further to the customer.  Furthermore, these e-commerce companies practiced monopolistic practices like barring brand owners to sell certain models through general trade… The rules have been made tighter.  But then the rules already existed.  For those players who understood the spirit of the law, Indian multi-brand retail trading was not a feasible business.  India needs support to create an ecosystem of Indian-owned Indian-managed businesses doing spectacular work like that done by Amazon or Alibaba in their respective countries.”


Affirmative Action for Low-Income Segments in Upper Castes

India’s central government recently introduced a bill to reserve 10% of all seats in educational institutes and government jobs to so-called Economically Weaker Sections (EWS) of the population, being citizens or households with income below a certain threshold level that do not belong to any of the “Backward Classes”[1] already subject to affirmative action measures.  Media publications weighed in on the political implications of the bill.

A columnist for the Indian Express hailed the government’s initiative as a progressive and secular move.  “There are several noteworthy points about the 10 per cent quota bill that has just been passed in Parliament … the party’s spokespersons did not emphasise the fact that [this] was the first time in India’s long non-secular history that a government welfare programme specifically included Muslims under its umbrella of recipients … In 1983, an average [affirmative action covered] youth had 2.4 years of educational attainment and an average Muslim youth had 3.3 years; in 2011/12, an average [covered] youth had 7.1 years of education, and a Muslim youth had the least educational attainment in the country, 6.9 years … What deserves emphasis is that the 10 per cent quota for the [Economically Weaker Sections EWS] of the population (around 30 per cent of the total population) is the first reservation system for those not currently covered by government support. This will be the first time that poor individuals will get a chance. And given that Muslims are the poorest, they should obtain preference in the EWS 10 per cent quota.”

A columnist for Bloomberg Quint highlighted the legal hurdles before the bill to pass the test of constitutional validity, and questioned whether it would pass this test:  “To predict whether the ‘Constitution (One Hundred and Twenty Fourth Amendment) Bill, 2019’ will stand the scrutiny in courts would be to take on the task of an astrologer.  Yes, a few assumptions may be made on the basis of existing precedents on the subject.  It has passed through both Houses of the Parliament with all-party support… Its journey through the courts is likely to be far more bumpy. The big constitutional question will be whether the amendment violates the basic features of the Constitution, democracy, equality, and secularism to name a few… Poverty is not an immutable characteristic such as race or sex, nor is it stigmatic in the way caste is.  It is possible to eradicate poverty with appropriate policy changes.  A sustainable and equitable economy needs to be in place with redistribution of income and wealth.  The bill does not achieve that purpose.”

Scroll.in, an online publication, cautioned that the move was a political gamble that may backfire.  “…the decision is likely to have unanticipated consequences.  For one, it is likely to consolidate the Other Backward Classes and Dalits.  For another, it will pave the way for more people to demand proportionality to be introduced, that government jobs and college seats must be distributed among social groups in proportion to their share in the population.  Social groups that are not in the reservation pool have long demanded a quota for the poor among them.  Their jubilation at the decision, in a way, is similar to the response that greeted Modi’s announcement of demonetisation in late 2016.  The poor mistook it as a substitute for class war and thought they would gain at the expense of the rich.  It took them a while to be disabused of this notion.”


The Congress Party’s Promise of Minimum Income

In the buildup to the 2019 General Elections, Rahul Gandhi, President of the Congress Party announced that if his party comes to power, it would guarantee a minimum income to the poor in all states.  Mr. Gandhi’s announcement came at a time when there was speculation that the ruling BJP could announce a similar welfare measure of its own in its latest budget.  Various media publications opined on Mr. Gandhi’s announcement and its likely implications for the Indian economy (if implemented).

An editorial in Live Mint opposed the idea, arguing that India cannot afford to guarantee minimum incomes.  “While governments everywhere should take care of their most vulnerable citizens, the idea of guaranteeing a basic income is wrong for India right now.  Fundamentally, it would only work if two conditions were met. First, large sections of the population would have to be mired in absolute poverty.  And second, all other subsidies and welfare programs for them would have to be abolished in order to free up the necessary funds without completely blowing open India’s fiscal deficit, which is already strained.  Neither condition prevails in India.  While there’s no recent government estimate of the number of people living below the poverty line, credible research by the Brookings Institution suggests that extreme poverty in India, defined as those living on less than $2 a day, now afflicts only five percent of the population.  Granted, that’s still more than 70 million people. But, for the vast majority of Indians, the challenge is no longer subsistence, it’s aspiration. No basic income guarantee will be able to address rising aspirations unless it’s a very large sum of money.  At India’s level of national income, providing anything more than a subsistence income would simply be unaffordable.”

The Hindu, on the other hand, argued that a minimum income scheme could be made economically viable by cutting subsidies, and not raising taxes.  “The question is to find the funds for this new paradigm of welfarism.  Rather than focus on raising tax rates, the axe should fall on a plethora of unwanted subsidies.  Even if one assumes that an income transfer programme were to cost, say, 4 per cent of the GDP, this can be realised by pruning “implicit subsidies” availed by the middle class, identified by the Survey.  These include concessions on LPG (already being pared), railway tickets, aviation fuel, personal income tax exemptions and gold. While a targeted scheme is likely to give rise to inclusion errors, these may be less than the cost of covering the whole population.  However, leakages arising out of targeting can be huge in backward regions where the bureaucracy is corrupt, and the people lack social agency.  An income support programme should be tailored to regional specifics.  The debate on whether conditional cash transfers, such as the Bolsa Familia programme in Brazil which links transfers to families sending children to school, yields better results than a non-conditional transfer has not been resolved.  Finally, inclusive growth cannot remain a slogan; it is essential for growth with stability.”

Finally, the Economic Times opined that while certainly topical, the idea of guaranteed minimum income was not a novel idea.  “India already has a basic income scheme for the poor, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), that guarantees 100 workdays every year at minimum wage, to whoever wants it.  This is a dole; the work part is supposed to be a self-selection method: for people who are willing to turn up to do manual jobs so that landlords do not claim the benefit.  And the cost is estimated at about 0.3% of GDP, much lower than the Universal Basic Income Scheme that only developed economies can afford.  So, if the so-called minimum income guarantee scheme is limited to the poor and replaces the MNREGS and other subsidies like old age pension, the tab on the exchequer may not be huge.  It would also be lower than a farm loan waiver.  The question really is whether this will supplant other subsidy schemes or supplement them. If the income guarantee scheme is added on to other schemes that include a farm loan waiver, will the Centre have the fiscal capacity to deliver the scheme?  Certainly not, when tax revenues (centre and states combined) are at a mere 16.5% of the GDP unless, we are okay with running up a high fiscal deficit.”



1. Collective term used by the Government of India to classify castes which are educationally or socially disadvantaged, see the National Commission for Backward Classes

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