Flipkart puts spotlight on e-tailers

Flipkart puts spotlight on e-tailers

Home-grown online retailer Flipkart appears to have lost more than what it has gained from the Monday’s ‘big billion day’ sales extravaganza. 

Flipkart claims that it had hit the 24-hour sales target inside 10 hours on that day. If success is defined only by numbers, it has reason to cheer.

Clearly, Flipkart was the talk of the town that day. It was so far all the negative reasons, however. So much so, the founders have to come out the very following day to publicly say sorry in a lengthy email to angry customers, who felt cheated. Flipkart founders sought to assuage their feelings by acknowledging their failure to anticipate the glitches when the sales commenced Monday morning, leaving many frustrated and furious.

Predictably, the Flipkart fiasco has galvanized the offline retailers to close ranks, and even demand regulation of e-commerce, which is just beginning to gain some toe-hold in the Indian retail space.

The Monday sales extravaganza of Flipkart has raised several issues, which will have far-reaching social implications. 

Not a new trend

 

Freebies, deep discounts, and attractive offers – they aren’t the recent trend. We have seen how, in the 90s, the non-banking finance companies of unincorporated kind had caused havoc, putting many a gullible investor to permanent misery and even forcing the Reserve Bank of India to tighten the screws on them.

The NBFC industry is still recovering from that shock. More recently, we have been witness to a no-holds-barred ‘sky war’, causing huge disruptions in the airline industry. In the first instance, unsuspecting investors were the casualty. In the second one, the public at large is indirectly paying since the public sector banks have lent heavily to the airline industry.

‘Customer is the king’, it is often said. The so-called king of free market was virtually taken for a free online ride by Flipkart. It is not just the question of access to the site. It is also not about the inability to buy intended goods on offer. It is not even about technical glitches. It is all about the intention. What is the intention? Is it just about hitting a particular sales number by somehow?

In a close-ended offer of this kind, one does anticipate a big rush. With a kind of ad blitzkrieg unleashed by Flipkart on Monday morning, it was a sure invitation to stampede. The limited offering in each product – even at deep discounts – means the loss is defined upfront for Flipkart. Perhaps, the online retailer expected the gain in terms of brand awareness to outweigh loss due to `discounted sales’.  

The other issue is about servicing the products bought online at such deep discounts. Big white goods makers have already reportedly logged off Flipkart for its distorting act of offering predatory pricing. Some have even threatened to take legal route to stop online retailers from offering such deep discounts.

The single-day product-wise limited offerings has indeed helped Flipkart get the desired number and also visibility. What has surprised a lay observer is that these e-commerce firms have elicited huge PE (private equity) interest. Many PE players have rushed in to place heavy money on them. 

No free lunch

 

There is nothing like a free lunch. These PE players will take out more than what they have invested in these e-commerce firms sooner than later. In the modern day, perception often times determines the valuation, which may be disproportionate to the age, size and sales number of a firm.

The timing of the big bang sale by Flipkart could not be wished away, coming as it did in the wake of a high-profile visit of Amazon boss to India a few days ago. What is the differentiator in the e-commerce world? Just the competitive deep discounts! In the game of one-upmanship, the ‘big billion day’ may have helped Flipkart drive its market value up.

The moot point, however, is: Does the end justify the mean? Flipkart has opened up a fresh debate, and the world of e-commerce has suddenly come under intense scrutiny.

Inclusive budget option for Modi govt

Inclusive budget option for Modi Government

As the Narendra Modi-led BJP Government is getting set to present its maiden budget next month, expectations are, understandably, running high. On the one hand, every constituency will be hoping the Modi Government to shower some concessions or the other on it.

On the other, every economist will be wishing the BJP Government to plug the gaping hole in its cash box. The task is, however, easier said than done.

There a quite a number of challenges staring at the new government right now. How to put the economy on to an acceleration mode? How to do it without inviting price spiral?

An influential section has been pleading for putting more money into the pockets of common men. Some have countered this saying that this will further fuel inflation, which has already seen a huge hole in their pockets.

Not surprisingly, the reported move to raise the income tax limit to Rs.5 lakh from the current Rs.2 lakh has elicited extreme reactions. Casting aside the merits and demerits of such a move, it can be safely argued that inflation has indeed hurt every Indian who earns the money hard way. Inflation-caused erosion in their income needs to be compensated.

It is indeed a fair argument. But how could the government compensate the revenue loss if it lowers income tax rates?

Complex politics

Given the complexity of the Indian politics, many segments are still functioning outside the organised economic system for assorted reasons. Perhaps, this is the reason why certain well-meaning policy actions of the Reserve Bank of India aren’t exactly been able to see the desired, rather intended, effect on the economy.

Often times, top officials of the RBI have suggested the need to move away from cash and into cashless system. The reason is not lost on discerning students of economics.

As the fiscal and monetary managers are battling to bring everybody into the organised stream, the best course open in the interim is to use indirect means to bring them on board. Precisely this in view, many have suggested lowering the tax and widening the base.

Best option

The exclusion of certain segments from the organised stream due to extreme politicisation of caste, creed and community in the Indian context has to be dealt with innovatively by the economy managers. The best tool available for the fiscal managers is to use the indirect tax as an ingenious way to bring even those who skirt the system on board.

Indirect tax by definition is regressive. How to remove this tag from it, and make indirect tax a secular one? It calls for a “least taxation’’ system.

Will the Modi Government take the bull by its horns? That is the moot question, though. 

Clearing the cobweb - Modi' s task

Clearing the cobweb

Narendra Modi-led BJP may have stunned the nation with a resounding show at the general elections. The road ahead for the BJP-piloted NDA (National Democratic Alliance), however, is full of potholes. The task of relaying it is easier said than done. There are a few things within its control to begin the long journey in right earnest. The first task is to address the perception problem. A sense of negativity has engulfed the nation, as a whole, and the economy, in particular. Removal of this spreading perception is indeed the immediate job before the new government. 

Non-functional phase

The second-half especially of the UPA-II (United Progressive Alliance) of Dr. Manmohan Singh, rightly or wrongly, came to be viewed as largely a non-functional phase. It was a government of inaction for some, and of slow action for still others. As a consequence, there was a widespread feeling of let down.

Though the Singh government resorted to some pinch-hitting in the dying moments, they proved insufficient to clear the deeply set misgivings. This perception has seriously hurt the business and commerce.

What the country is looking for in the very near-term from Mr. Modi the prime minister is decisiveness in policy articulation and execution. With BJP getting majority of its own, Mr. Modi is advantageously positioned vis-à-vis his predecessor, who was constantly weighed down by compulsions from within and outside his party. Policy consistency was a casualty in Mr. Singh’s second tenure. This has caused quite a lot of resentment, and scared away foreign direct investment. The government has a legitimate right to demand its due from the business class. Can it do so by tweaking the interpretation of the rules? That is indeed the point of debate here. Retrospective application of rules, newer interpretation of laid-out regulations and the like don’t really speak eloquently of the government’s policy-framing capability. 

Divide of a different kind

The underlying anger among the business community — from within and outside India — has come out in different formats. Mr. Modi is well aware of the repercussions of this angst on the Indian economy, which has gone into a fast deceleration mode.

The liberalisation, in its wake, has also brought about a divide of a different kind. Has this resulted in a bias in favour of multi-national companies? One can discern a feeling of discomfort among the Indian enterprise. A sudden spurt in HR-related disputes and job axes in MNCs gives credence to this argument.

Certainly, the Modi government must have an inclusive approach to society as a whole. It also needs to go beyond, and have inclusive attitude towards local enterprises too.

Given the size of its population, India needs to pursue a holistic path to growth. The growth of the service sector, especially the IT (information technology) and ITeS (information technology-enabled services), has put the country in a position of strength in the global marketplace. Thanks to IT and ITeS, India today is lot more visible in the global map. Nevertheless, a strong manufacturing base is indeed an unavoidable essential option to push the economy back into high growth orbit. If population defines the market, India is astoundingly a large place for any manufacturer.

The priority must surely be to strengthen the production base to satiate the increasing aspiration of young Indians, who have become lot more demanding.

With supply constraints triggering rising inflation, the Modi government has the task really cut out. And, it has to start, and start just now on this score.

Facilitator role

What is important for the new government is to play a quick facilitator role. A combination of factors — aided by simple inertia of the rulers, on the one hand and aggressive activism of assorted institutions, on the other — have literally stopped any forward movement in the crucial infrastructure space. All these have ultimately resulted in the country stagnating in critical areas such as electricity, coal et al. The onus is on the new government to quickly move in to clear the cobweb, and facilitate the turnaround process.

Consumer is the king, it is often said. However, successive governments have ensured that they remain their prisoners through dole out of freebies. How to empower them and help them eke out an honourable living? This can be done by providing them work, ensuring that their jobs are secure, and leaving enough in their pockets.

This is, however, easier said than done. Mr. Modi has clear mandate to provide a stable government at the Centre. With stability secured through a decisive electoral mandate. Mr. Modi, hopefully, will deliver quickly without any loss of time. 

jagannathan.kt@thehindu.co.in

http://www.thehindu.com/business/Industry/labour-pains-at-nokia/article5951454.ece

Labour pains at Nokia

When elephants battle, the ants perish!  How else could one describe the predicament of the workers of Nokia’s India unit Sriperumbudur (near Chennai)? On Friday last, the devices business of the Finnish company formally moved over to software giant Microsoft under a 5.4 billion euro agreement inked late last year.  Loss-making and struggling, the division still has a strong brand visibility with a sizable global workforce of 32,000. Nearer home, however, the focus is on the fate of the 7,500 workers at Sriperumbudur. They find themselves in a peculiar position. Caught between a reluctant Microsoft and a ready-to-give up Nokia, these young men and women are unsure of their future. They are now like unwanted children. They are the victims of insensitivity demonstrated by people who matter and the powers-that-be.  

A dip into some numbers will give a clue or two to the status of the Chennai plant, which has transformed the very landscape of the industrial corridor in this belt along with other iconic multinationals such as Hyundai, Saint Gobain and Flextronics, to name just a few. The plant reportedly had notched up a revenue of Rs.150,000 crore between 2006-07 and 2012-13 by exporting handsets to about 75 countries. Viewed against this backdrop and coming in the wake of its deal with Microsoft, the uncertainty surrounding the Chennai facility has raised a number of issues.

Compounded worries

The problem started when Nokia got embroiled in a Rs.21,000-crore dispute with the tax authorities. That has developed into a full-blown legal tussle going right up to the highest court of the land, with contesting parties taking strident positions. Early last month, the Supreme Court dismissed Nokia’s appeal challenging a Delhi High Court order inserting a rider in the transfer of the company’s Indian assets to Microsoft.  The Delhi High Court had asked Nokia to give a ‘simple undertaking’ in addition to depositing Rs.2,250 crore in an escrow account. Nokia was unwilling to accept this new condition, and, hence, moved the Supreme Court. Acceptance of this condition would have resulted in Nokia agreeing to an open-ended guarantee that the company would meet any future tax claims relating to the dispute. And, the Delhi High Court made it clear that these conditions must be first satisfied before Nokia could transfer its Indian assets to Microsoft.

Problems never come singly, it is said. Even as it was fighting the I-T case, Nokia’s troubles were compounded further when the Tamil Nadu Government slapped a Rs.2,400-crore tax notice on the company. The state government claimed that the devices made at the company’s Chennai plant were sold domestically and not exported as claimed by the company. The timing of the notice is puzzling indeed. Why did the TN government sleep over this all these years if Nokia had indeed not been exporting but only selling locally?

Microsoft is obviously not willing to touch the legal-riddles-hit Chennai plant.  And Nokia has little options. Having quit the devices business, a disinterested Nokia is now forced to hold on to an unwanted baby (Chennai plant)!

The Nokia imbroglio has brought into focus the sharp differences in the way tax-related disputes are handled, especially in the context of emerging international order, where mergers and acquisitions are common. Tax on royalty payment is always a contentious issue. This has become so in view of the differing views on the applicability of rules. Should Section 115A of the Income-Tax Act, 1961, be applied? If so, it obliges an Indian resident to deduct a 10 per cent tax from royalty payments to a foreign company. Nokia India (which is a resident of India) has been paying Nokia Finland royalty for software downloaded into the handsets made in India.

Royalty is paid for the use of technology for producing goods or services in India for earning income within India. Ipso facto, it is in order to demand a foreign company — irrespective of its location — to cough up tax in India. Some analysts are of the view that the Indo-Finnish double taxation avoidance agreement, too, concedes that a 10 per cent withholding tax could be deducted. The moot question is whether Nokia Finland passed on the technology to India. What if the technology had been developed elsewhere in the globe and passed on to Nokia India? One argument runs like this. If the software is downloaded and if such downloading requires royalty payment, the Indian tax authorities have the right to demand their share. The software is after all used in the products made in India, and thus helps to beef up their profitability. The Indian tax authorities have relied on the UN model, which lays store by the source rule of taxation. In this instance, the source of income for Nokia Finland is in India. This methodology has not found favour with many a global company. They prefer the OECD (Organisation for Economic Co-operation and Development) model, which focuses on the ‘resident rule’. Nokia Finland is not a resident of India, and, hence, its tax liability is to the Finnish government and not the Indian government. So runs an argument.

M&A conundrum

This tax debate can go on till the cows come back. The issue, however, is how do we address the M&A (mergers and acquisition) consequences, in the meanwhile. Any effort to hold up the process is bound to vitiate the competitive environment, which New Delhi has assiduously tried to build ever since the globalisation process was set in motion in the early 1990s. What has come to hurt in this specific instance is not just the way the taxmen have gone about doing their job but the timing. They caught on to Nokia just when the stage was set for the transfer of the device business to Microsoft. May be they have timed it right so as to squeeze the Finnish maker into submission. Nokia, too, hasn’t helped the cause for an amicable solution to the issue. It is not willing to provide a guarantee to meet any future claims relating to the tax dispute. The underlying assumption here is simple. What if the ruling goes against it?

Could the authorities have allowed the transfer of Indian assets when the case is pending? Is it possible to make the acquirer honour the court order once the final verdict is pronounced? In that case, the current uncertainty could have been avoided. While blocking only the transfer of assets, the plant workers have been unjustly discriminated against vis-a-vis the other employees (like sales and marketing), who have been moved to the recently-formed subsidiaries.

The Nokia episode doesn’t augur well for any of the stakeholders, especially the workers. There are many lessons to be learnt. The most important is finding an acceptable tax framework that is in sync with the dynamics of the market economy, and also just and equitable.

jagannathan.kt @thehindu.co.in