ONDC and the Political Economy of E-commerce in India
By Rohin, AIITEU Delhi NCR
India’s e-commerce market has been booming for some time: according to a Parliamentary Standing Committee report, the market is expected to grow from $ 46.2 billion in 2020 to $111.4 billion in 2025. Private estimates predict a rise to $400 billion by 2030 on the back of heavy increases in funding, projecting 19% compound annual growth between 2022 and 2030.
However, the sector has also witnessed significant concentration. For example, in 2021, during the Diwali sale season, Walmart-owned Flipkart and Amazon had 60% and 32% of the market share by Gross Merchandise Value (GMV) respectively. The two giants also have significantly more monthly active users at 3 crore and 1.5 crore respectively as of June 2022. In comparison, their closest competitor, Reliance JioMart, has only 50 lakh users.
However, this picture is not entirely rosy for these two entities. For a start, Amazon has faced notable legal travails, from its run-in with the Competition Commission of India to its legal battle with Reliance over Future Group’s logistics business. Furthermore, even at their scale, neither business is profitable, nor has either business come close to even balancing its books in the last couple of years. That they have been able to achieve such a size without turning a profit has been a cause for consternation among traders, with the Confederation of All India Traders (CAIT) and the Indian Sellers Collective having held multiple protests against the two companies over the last few years.
Many small retailers have complained that it is the presence of foreign capital that has caused such distortions. The deep pockets of foreign entities allows them to eat away at these smaller retailers through predatory pricing regimes and deep discounting, letting them ‘conquer’ the Indian e-commerce market as it were (the strength of these sentiments can be adjudged by the fact that some of the protestors have gone as far as to burn effigies of Jeff Bezos).
These issues must be considered alongside the overall structure of the retail sector. While e-commerce has indeed grown rapidly, it still constitutes only 4.3% of the Indian retail market. By comparison, the ubiquitous kirana stores compose about 80% of the market. Helping these traders onboard themselves onto a digital marketplace would provide a big fillip to the reach of these stores and provide them with the efficiency gains that would accompany this new digital marketplace. This is where the Open Digital Network for Commerce or ONDC comes in.
How the ONDC will work
The Open Digital Network for Commerce (ONDC) will be a digital infrastructure network consisting of :
- Protocols;
- Registries;
- A market discovery gateway;
- Buyer and seller side applications.
The protocols will be developed by the ONDC mission team to ensure all commerce related information can be exchanged over the network in an interoperable manner, while the registries will simply be databases of network actors and network policies.
The fundamental part of the ONDC, indeed the reason why it is ‘open’, is the market discovery gateway. Within the ONDC, customer facing applications and retailer facing applications will be different units, though the same entity may of course provide both services.
These two sides will be connected by the gateway, which will ensure that all sellers are visible across all consumer side apps. For seller side apps, they will have access to all the retailers, thus improving their choices for fulfilment.
Since the network will help bring kirana stores onto the digital marketplace, seller side apps may be able to provide better and faster service delivery. With the default option being to prioritise the retailers closest to the final delivery location (though this can be toggled through the user settings), the ONDC network will try to provide a boost towards developing hyperlocal supply chains.
According to the ONDC strategy paper, over the next 5 years, the ONDC platform will add Rs. 3.75 lakh crore in gross merchandise value and increase the volume of e-commerce transactions by 730 crore.
Corporate friendly governance and the residual risk of concentration
While, as a concept, ONDC holds tremendous potential, some attention must be paid here to the governance framework offered so far. The ONDC body will be a Section 8 (not-for-profit) entity with majority private sector ownership along with some government entities. An ONDC mission team will be established to implement the network, while the ONDC Advisory Council will continue to provide overall guidance.
This structure follows the Goods and Services Tax Network (GSTN) and National Payments Corporation of India (NPCI) model, wherein ostensibly ‘public’ digital infrastructure goods are in fact owned by a mixture of public and private entities.
The issue here, of course, is that this would effectively allow these private entities to exert influence over network policies and regulations. Thus, the statutory powers of the state are effectively being weakened in the name of promoting ‘corporate governance’. Indeed, such questions have been raised about the composition of the Advisory Council and potential conflicts of interests that already arise.
Furthermore, in the case of networks, private sector control brings further risks. As has been witnessed in other sectors, from food to transport to grocery deliveries, and of course within the e-commerce sector, capitalist ‘competition’ amongst platforms invariably ends up resulting in oligopolies, wherein a few platforms dominate the market and practically set the rules for conduct on the platform. These platforms are then able to extract super profits from the platforms they control due to the network effects of their outsized dominance over the market (it is of course another matter that even despite this outsized control they are unable to attain profitability).
The ‘UPI model’ will not work
Now, the Union Government believes that its structure as an ‘open network’ will allow the ONDC to sidestep such issues, pointing to the success of UPI (even though it is contemplating setting up an independent regulator for e-commerce).
While the growth of UPI as a digital payment system is indeed phenomenal, there are many dark clouds on the horizon. One of the reasons for the growing ubiquity of UPI payments is the low transaction cost. However, this low cost is, in a sense, only ‘artificially’ low. This is because the Centre had set the Merchant Discount Rate (MDR), the percentage fee levied by banks on the payment gateways that help to settle financial transactions, for UPI transactions at zero in January 2020 to encourage the growth of UPI.
However, over time, this has meant that the losses caused by this have had to be taken on either by the banks or by either payment gateways, leading to the government having to provide compensation to the banks for losses due to the zero MDR policy. Beyond the banks, even a recent Standing Committee report on ‘Promotion and Regulation of E-Commerce in India’ has recommended a relook into the payment structure for UPI, leading to the likelihood of an increase in the MDR in the future. Now, when this happens, some, if not all of this increased cost, will be passed onto users.
At this point, the two UPI apps that control more than 80% (by transaction count) of the market (PhonePe and Google Pay) will be able to leverage their market share along with their differential access to data to exert further dominance over the market and hold users over the barrel.
This threat is only exacerbated by the facts that:
- UPI payments are increasingly becoming the preferred mode of digital payments and are expected to grow further in volume, and
- The government app, BHIM, meant to provide a public sector alternative to the private apps, has seen its market share fall from 40% in August 2017 to 0.74% in September 2021, recovering only slightly to 1.7% in April 2022.
Foreign capital vs domestic big bourgeoisie?
Many people have billed the ONDC as a pushback against the dominance of foreign capital in the form of Amazon and Flipkart by domestic big bourgeoisie. Such sentiments are based on the ruling Bharatiya Janata Party’s perceived closeness to certain big Indian businesses such as the Reliance Group and the Adani group.
Beyond these two behemoths, the BJP seems to have programmatic support towards the domestic big bourgeoisie (for example the Birla and Tata groups) at large through its policy of a private sector led push towards ‘self-reliance’ via a combination of targeted privatisation in favour of certain companies, and deregulation.
The Prime Minister’s comments from earlier this year about how “[g]overnment has no business to do business” only enhance such a perception. Further evidence in favour of this view is cited via the works of the RSS’s economic guru Dattopant Thengadi, whose ‘Third Way’ approach rejecting both globalised capitalism and international communism would seem to lay the theoretical foundations for such an economic paradigm. However, while such a perception of ONDC may be, at the very least, partially correct, it is plagued by certain lacunae.
For one, the misreading of the ONDC as a platform in and of itself may lead to the erroneous conclusion that the Union Government will be launching its own e-commerce platform. Its structure as an open network (rather than a platform) allows the ONDC to be a site of contestation for economic power.
Indeed, this is why Amazon and Flipkart are, publicly at least, “excited” about prospects of ONDC and are expected to onboard onto the network promptly, which, it must be noted, only calls for voluntary participation.
Moreover, beside any economic considerations, the ONDC project may stem more from the BJP’s desire to placate small retailers. Despite considerable economic woes, small traders and businessmen continue to form a key part of BJP’s support base. However, this relationship has been put under strain since demonetisation occurred in 2016. Since a lot of these very traders likely participated in the protests against Amazon and Flipkart (and have certainly felt under pressure while competing against these giants), the BJP may want to mollify these traders.
The current model of the ONDC offered by the ONDC strategy paper offers the government a way to, if perhaps only on paper, provide foreign capital, Indian big capital, and petty-bourgeois merchants with a common network to transact on for which all three parties could at least claim to derive considerable benefits from.
However, it is unlikely that such ‘benefit-sharing’ will actually take place, leaving open the question of how the government will react should market concentration emerge within the ONDC ecosystem as well. To continue the comparison with UPI, though there is an official ceiling on the market share of UPI apps, the time for compliance keeps getting extended, the result of which is Google Pay and PhonePe’s robust control over the UPI market.
What the future holds
The pilot phase of the ONDC began at the end of April with trials in five cities — Delhi NCR, Bengaluru, Bhopal, Shillong, and Coimbatore. The result of these pilots will only become clear with more time, though initial reports suggest that in Coimbatore small retailers are recognising the benefits of an open digital network for commerce. What one must watch out for is whether the focus on hyperlocal deliveries will help small retailers compete with big e-commerce companies and delivery startups.
Nevertheless, in the long run, a fundamental determinant of the ONDC’s success will be the governance model. Should private entities continue to have a say over the regulatory apparatus of the ONDC, one can expect, at the very least, the continued dominance of Amazon and Flipkart in retail, even if grocery markets see some slight pick up (an unlikely scenario, given the frenetic pace at which new grocery delivery startups are operating and the vast amount of venture capital that continues to back them).
The ONDC strategy paper itself does not provide any concrete answers as to what shape and form the ‘rules’ of the platform will take. To what extent will predatory pricing be allowed? Will the dominant entities be able to bypass the ONDC’s filters to privilege certain favoured retailers or forge exclusive deals for key products? Will other manipulations of retail search indices continue?
The answer to such questions will determine whether the ONDC will truly be able to help transform the Indian retail sector. What is clear is that for the latter to happen, key digital public goods such as the ONDC must remain under the statutory control of the state — that is, be truly ‘public’.
