Modi Won’t Let Amazon Crush India’s Retailers, For Now

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Photographer: Dhiraj Singh/Bloomberg© 2017 Bloomberg Finance LP

India’s Prime Narendra Modi wants to crush Amazon before it crushes his country’s mom and pop stores. At least until the upcoming elections are over, that is.

Amazon is growing big and powerful. But some governments are already bigger and more powerful than any individual company, and the means to spoil Amazon’s ambitions to take over the world — ie dominate world e-commerce, crushing mom and pop stores in the process.

That’s the case in India, where the government has been putting in place a number of regulations lately to slow-down the retailer’s growth there. Like a regulation that prohibits foreign retailers from maintaining merchandise inventory and selling it directly to customers.

Then there’s the regulation that prohibits foreign retailers from selling merchandise through local subsidiaries — a way foreign retailers have attempted in the past to bypass the first regulation.

These regulations are certainly good news for India’s e-commerce retailers and small mom and pop store owners. But they are bad news for Amazon. They have forced the company pull thousands of items off its site last week, according to a Reuters report.

That’s something that should worry Amazon’s investors. The e-commerce giant has already warned investors about the impact of India’s new regulations on its future revenue and earnings growth.

Amazon RevenueKoyfin

“India’s new rules certainly make it tough for Amazon to rely on the world’s second-largest consumer market for its global growth,” says Haris Anwar, Senior Analyst at global financial platform Investing.com. “After its failure in China, India had become a key market for Amazon to pursue, but now it must figure out how to navigate the subcontinent’s complex rules and justify its huge investment there.”

Jeff Yastine, Senior Equities Analyst at Banyan Hill Publishing, isn’t concerned. “My message for Amazon investors would be to have patience,” he says. Yastine sees the recent regulations as part of Modi’s administration to win the vote of family shopkeepers in the next elections. “The e-commerce rules are a political tool aimed at gaining favor with India’s legion of family shopkeepers and helping Modi and his government win the upcoming election and stay in power.”

That’s the safe road for Modi to take in the current environment, according to Yastine. “With unemployment at a 45 year high (the result of 2 huge political events – the government’s takedown of India’s huge “cash economy,” and a first-ever unified tax code), the Modi government is taking the safest course possible to maintain its hold on power,” he adds.

The battle between foreign retail giants and domestic mom and pop stores is neither new nor unique to India. “It’s important to remember that, while e-commerce is making rapid inroads, India’s retail sector today still looks a lot like America’s retail industry in the early 1900s, where small inefficient “mom and pop” stores dominate, and represent a powerful bloc of voters and entrenched interests,” explains Yastine.

Still, Yastine doesn’t expect regulations of foreign retailers to last beyond the elections. “India’s retail sector is ripe for disruption by major retailers, but the Modi government will have to go slow at least until the fast-growing Indian economy absorbs more of the unemployed workforce,” he says. “Presuming Modi’s hold on power is assured in the elections (and by no means guaranteed), I have no doubt that Modi will enact legislation that will give major retailers the free hand they need, with rapid restructuring of India’s retail sector to follow.”

Simply put, India’s mom and pop stores are just buying time before they are crushed by retail giants, as has been the case in America and elsewhere.

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