India's E-commerce Crackdown

New rules will force Amazon and Walmart’s Flipkart to make big changes in the way they sell

Saritha Rai

India, where millions of small, fragmented, often inefficient operators dominate retailing, was supposed to be a prime candidate for disruption by the likes of Amazon.com Inc. and Flipkart Online Services Pvt., in which Walmart Inc. invested $16 billion for a majority stake last year. Their huge economies of scale and partners that could supply exclusive goods at lower prices seemed certain to give them an edge. But now it looks like the e-commerce giants that have aggressively expanded across the subcontinent may be the ones disrupted.

Amazon’s and Walmart’s grand plans for India were thrown into chaos on Feb. 1 after Prime Minister Narendra Modi’s government tightened e-commerce regulations, forcing drastic changes in the way they do business. As foreign-owned businesses, Amazon and Flipkart are now banned from cutting exclusive arrangements with sellers, offering deep discounts, or holding any business interest in online merchants that sell goods on their websites. Thousands of products have already vanished from the virtual shelves of the two companies, which together account for 70 percent of India’s online retail market. Arvind Singhal, of consultant Technopak Advisors Pvt., estimates their revenue growth could fall to 15 percent in coming months, from 25 percent to 30 percent recently.

Meanwhile, the impact of the rules could go beyond the online retailers that operate broad shopping portals and hit other e-commerce innovators in areas such as furniture retailing, food delivery, and hotel reservation aggregation. Some of the startups in those sectors have other business ties with companies whose products and services they sell—arrangements that the new rules forbid. “I expect the bulk of the e-commerce companies are non compliant today,” says Sanchit Vir Gogia, chief executive officer of consulting firm Greyhound Research in Delhi.