American retailer Walmart-backed Flipkart and US-based Amazon - the two largest players in the Indian e-commerce sector - would be hit the hardest. Over the years, smaller traders have cried foul, alleging that preferential treatment was given to certain sellers that are affiliates of these larger online marketplaces. Market watchers said wholesale companies controlled by Amazon and Flipkart would buy goods in bulk at cheaper rates from manufacturers, which would then be sold on the online marketplaces through ‘select sellers’ (like Cloudtail and WS Retail) who would also offer discounts and cashbacks. The new rules clamp down on exclusive deals; this could cast a cloud on partnerships seen in the past including those with electronic and smartphone brands like ASUS and OnePlus.

The curbs follow intense lobbying by small traders, particularly after Walmart spent $16 billion to acquire Flipkart this year. The retail sector, which includes an estimated 25 million small traders, largely supported Narendra Modi in the 2014 general election. According to the Confederation of All India Traders, some small traders had seen earnings more than halve in the past few years as they struggle to compete with low prices offered by the American-controlled behemoths. Retailers and traders believe Modi turned a blind eye to what they say was the use of policy loopholes by Amazon and Flipkart to offer heavy discounts that allowed them to seize market share for goods such as electronic items.

Some experts warn that buyers are going to feel the pain of fewer discounts, which may end up being seen as an anti-consumer move. The threat of job losses in the supply chain network has emerged as another major concern. This assumes significance ahead of the 2019 polls where jobs are already shaping to be a key campaign issue. Analysts believe the new norms may lead to short-term job losses, lasting up to six months, as companies work their way around the guidelines. Amazon India said it has “always operated in compliance with the laws of the land” and is evaluating the new guidelines. It has committed an investment of $5 billion - a large chunk of which has already been pumped in across various entities that it operates in India. Flipkart said the government should follow a consultative process in framing rules that have long-term implications, and any changes should be for driving the industry forward.

The new rules will come into effect from February 1. “We wanted to give the companies time to adjust their businesses as per the modified norms,” said an official, adding that a draft e-commerce policy is in the works, which will promote exports and growth.

Investment consultants warn the new curbs could harm online retail’s growth prospects and discourage some foreign investors. The US-India Strategic Partnership Forum dubbed the new rules as “regressive”, saying the changes would harm consumers, create unpredictability and have a negative impact on the growth of online retail in India. The Forum asserted that “it is not the government’s business to micromanage businesses” and alleged that the amendments announced came out without any consultation and are akin to changing rules in the middle of the game. The Forum further stated that the amendment “highlights the lack of transparency in policymaking and creates unpredictability”.

The Indian e-commerce market is expected to grow from $38.5 billion in 2017 to $200 billion by 2026. The growth has been made possible by increasing Internet and smartphone penetration. The ongoing digital transformation is expected to increase India’s total Internet user base from 445.96 million in 2017 to 829 million by 2021. Overall, India’s Internet economy is expected to double from $125 billion as of April 2017 to $250 billion by 2020, majorly backed by e-commerce.