Baba’s Explainer – Open Network for Digital Commerce (ONDC)

  • IASbaba
  • August 12, 2022
  • 0
Economics, Governance
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  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
  • GS-3: Indian Economy and Challenges

Context: Digital commerce is reshaping the global business environment and can provide a fairer and more inclusive playing field for businesses. It can create economic opportunities for new sets of players, especially small businesses.

  • COVID-19 has fueled the growth of digital commerce across the globe. Though digital commerce in mobility and travel services declined, digital commerce in the retail sector saw a rise in the share of total retail sales, from 16% in 2019 to 19% in 2020.
  • This was a result of a spike in business- to-consumer (B2C) sales, particularly evident in online sales of medical supplies, household essentials, and food products. COVID-19 also resulted in increased business-to-business (B2B) digital commerce.
  • The future of open retail is taking shape in India as the nation rolls out the Open Network for Digital Commerce (ONDC) in 100 cities in August 2022. It is being spearheaded by Infosys founder Nandan Nilekani.
What is the scenario of Digital Commerce in India?
  • The ongoing digital transformation in terms of access to connectivity at affordable cost, increase in internet and smartphone penetration and increased investments in the start-up ecosystem are significant factors contributing to this growth.
  • India has the third-largest online shopper base globally, with 14 crore e-retail shoppers in 2020, only behind China and the US3.
  • This number is expected to grow significantly with the addition of 37 crore Generation-Z consumers by 2030, who have grown up in an India with ubiquitous internet, smartphones, digital media, and digital consumption platforms4.
  • However, the COVID-19 pandemic exposed the critical shortcomings of the Indian digital commerce ecosystem when most parts of the retail chain were found to be digitally absent and there was a complete breakdown of the supply chain
  • Around 1.2 crore Kiranas stores (hyperlocal neighborhood provision stores) account for 80% of the retail sector in India, with 90% of them being unorganized, or self-organized and most of them digitally excluded.
  • As of September 2020, India is estimated to have 4.25 crore Micro, Small and Medium Enterprises (MSMEs) that have the potential to flourish with innovative sales and marketing efforts but are not part of this digital revolution.
  • Even on the consumer side, only a small portion (~20%) of the internet users in India are online shoppers.
  • Limitations are further evident from the share of digital commerce in the overall retail segment in India. The Gross Merchandising Value (GMV) for the digital commerce retail market in India was ₹2.85 Lakh Crores (US$ 38 billion) in 2020, which is only 4.3% of the total retail GMV in India.
    • India is well below the e-retail penetration in countries like China (25%), South Korea (26%), and UK (23%)9. By 2026, digital commerce in the retail sector in India is expected to grow to ₹15 Lakh Crores (US$ 200 billion)
How has digital transition left out small enterprises?
  • Small enterprises such as local kirana stores have not gained from the rapid advancement of digital platforms
  • Online purchases from “near and now” inventory from the local store remain in a digital vacuum. This is because, to sell on numerous platforms, sellers must maintain a separate infrastructure, which only adds costs and limits participation.
  • The distinct terms and conditions of each platform further limit the sellers’ flexibility.
  • Consequently, small and medium-sized businesses have lost their freedom to choose and participate in the country’s e-commerce system at their will and on their terms.
  • Alarmingly, centralising digital commerce transactions on a single platform creates a single point of failure.
What is Open Network for Digital Commerce (ONDC)?
  • Objective is to level the playing field by developing open e-commerce and enabling access to small businesses and dealers.
  • The ONDC network makes it possible for products and services from all participating e-commerce platforms to be displayed in search results across all network apps.
  • For instance, a consumer shopping for a product on an e-commerce app Amazon would also receive results from e-commerce app Flipkart, if both Amazon and Flipkart integrated their platforms with the ONDC.
  • This achieves the dual objective of wider choice for consumers on the one hand and access to a wider consumer base for sellers on the other.
  • Because ONDC functions as a set of standards, it will allow consumers to pick one of many platforms for shopping. Each platform will receive the same product, pricing, and availability information, based on one set of standards.
    • Earlier, to compare prices or offers, an online shopper has to hop from one platform to another, creating difficulties in comparing similar products by vendor prices, shipping costs, and taxes.
  • ONDC caps referral commissions for platforms that send shoppers to a seller at 3%, a far cry from the roughly 30% cut that third-party sellers lose on the existing major e-commerce platforms
  • ONDC is not an application, an intermediary, or a specific piece of software. Rather, it is a set of specifications designed to foster open interchange and connections among shoppers, technology platforms and retailers. At its core, ONDC is an open network and set of open standards similar to the Universal Payments Interface (UPI)
    • Open standards are the hidden foundation of the US economic and technology infrastructure. They underpin open networks (such as the internet), in which a core set of technology standards enables interconnection between different systems. Effective open networks and standards foster competition and eliminate friction and barriers to entry
  • ONDC aims to democratise digital commerce, replacing a platform-centric model (where the buyer and seller must use the same platform or application to transact)
    with an open network, allowing cross-platform and cross-application interaction and commerce.
What Benefits Does the Open Network for Digital Commerce(ONDC) Offer?
  • Level Playing Field: ONDC is keen to level the playing field for e-commerce operators and widen the digital market access for MSMEs and small traders in the country. Additionally, it will help new entrants by bringing discoverability, interoperability, and inclusivity.
  • Game Changing: If it works, ONDC could fundamentally change the rules of the game for e-commerce and retail — potentially on a global scale — and herald a future of more open and competitive retail with less dominance by vertically integrated platforms.
  • Empowering Consumers: It provides more granular control over the costs incurred by the consumers. They can choose the products from a large number of sellers, can get the price offered by the seller directly without being impacted by the pricing policy of the platform
  • Ease for Sellers: A standard seller onboarding process across the ONDC partners will provide a low barrier to entry for sellers. This can be especially helpful for MSMEs
  • Freedom of Choice for Consumers: Consumers can potentially discover any seller, product or service in a common platform, thus increasing freedom of choice for consumers. It will enable the consumers to match demand with the nearest available supply. This would also give consumers the liberty to choose their preferred local businesses.
  • Sets a global precedent on regulating Monopolies: It could show United States (US) regulators how to take on monopolies.
What impact will ONDC have on existing ecommerce and logistics companies?
  • As ONDC will interface with the existing ecommerce companies for seller onboarding and product listing, it is unlikely to upend the status quo in the ecommerce space. ONDC will rather augment the existing ecommerce ecosystem and benefit all the stakeholders. They will ensure greater reach for marketplaces and sellers, and also provide them a platform to directly compete with other ecommerce companies. The increased competition in this space will ultimately benefit the end customer.
  • The impact of ONDC on existing logistics companies will be much more pronounced. While logistics companies today operate mostly in the B2B segment, ONDC will open the doors of the B2C segment for them. Open competition to acquire and retain customers on ONDC will force logistics companies to make changes to their marketing and pricing models.
  • Currently, large merchants and platforms have access to best rates and service levels from logistics companies however upcoming merchants are generally have to go through logistics aggregators and are unable to get the best service level for their fledgeling business.
  • However, ONDC will break the access and discovery barrier to logistics companies and can result in opportunities for new logistics companies as well as a large new segment for existing logistics providers. To gain advantage from this market shift, the logistics companies would need to invest more in their technical capabilities as well.
What are the challenges related to ONDC?
  • Adoption Challenges: Even if it succeeds, its effect may not match its intent. Bringing the tens of millions of existing kirana stores onto the platform will require a massive,
    well-funded adoption campaign.
  • Match-Up Concern: Smaller businesses with low volumes may lack the resources to match the discounts offered by existing heavyweights like Amazon and Flipkart. These two global giants poured a combined USD 24 billion into India and captured 80% of the online retail market with aggressive discounts and promotion of preferred sellers.
  • Payment Challenges: There might be a mismatch in payment gateway compatibility between the different platforms.
  • Legal Uncertainty: The question arises about liability in case of a consumer facing any issue regarding the transaction or the quality of products or services delivered. It is unclear how ONDC fits into the entire legal landscape of e-commerce in India.
  • May not achieve desired objective: the large platforms may be the ones that benefit the most from ONDC. In the case of UPI, which was designed to provide an open standard for payments, Google Pay and Walmart’s PhonePe have grabbed a dominant share of the transaction volume.
  • Dispute Resolution: Due to the decentralized nature of ONDC and the low barrier to entry for sellers, it would be interesting to see how consumer complaints are taken care of. In traditional marketplaces, the marketplace policies generally ensre customer satisfaction. ONDC being an open platform will lack this until clear policies are worked out or apps are built to ensure consumers are satisfied and sellers are protected from dubious consumers.
    • Therefore, it is imperative to support this initiative with a modern-day, cost-effective, timely and high-speed online dispute resolution system(ODR)
  • Inclusiveness: ONDC must adequately and efficiently cater to facets such as participants residing or operating in different geographic regions and the mass prevalence of low-value online transactions.

Mains Practice Question – Do you think Open network for Digital Commerce is going to alter the paradigm of e-commerce sector? Critically analyse.

Note: Write answers to this question in the comment section.

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