Is the game over for Amazon in India?

Our goal with The Daily Brief is to simplify the biggest stories in the Indian markets and help you understand what they mean. We won’t just tell you what happened, but why and how too. We do this show in both formats: video and audio. This piece curates the stories that we talk about.?

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And the video is here .

In today’s episode, we look at 6 big stories:

• Will UPI change how India borrows?
• Is Amazon going back to basics?
• What the Bangladesh chaos means for Indian investors
• Will gold continue to shine?
• Indexation benefit is no longer mandatory for real estate
• A new CPI basket

Will UPI change how India borrows?

UPI is growing massively in India, and with it, we're also seeing a surge in credit transactions. These transactions have now hit about 10,000 crore rupees per month on UPI.

There are currently two ways credit transactions work on UPI:

1. RuPay credit card transactions
2. Bank credit lines

Of these, credit card transactions make up the majority, while credit line transactions account for a smaller portion, around 100-200 crore rupees.

RuPay credit cards are gaining popularity due to their convenience, now making up a quarter of all new credit cards issued in India. A credit line, on the other hand, is essentially a pre-approved loan or overdraft facility provided by a bank that can be accessed through UPI without needing a physical card.

Both credit cards and credit lines offer similar benefits to users: a free credit period of 30-45 days before interest is charged on the borrowed amount. However, the key difference is that credit lines don't require a physical card, which could make them more convenient for users.

Yet, credit line usage on UPI is still low compared to credit cards. The main reason for this is the MDR or Merchant Discount Rate.

MDR is a fee that merchants pay when they accept certain types of payments. For RuPay credit card transactions, there's a 2% MDR, with 1-1.5% going to the card-issuing bank. This helps banks cover the costs associated with providing the interest-free period.

The issue today is that there's no MDR for credit line transactions on UPI. This means banks don't earn any fees from these transactions, making them less profitable than non-UPI credit card transactions.

Because of this, only a few banks currently offer credit lines on UPI, and even then, it's mainly to stay competitive in the market. As more banks and users adopt this feature, competition might increase, potentially lowering prices and reducing banks' earnings from credit card MDR.

It's possible that credit line transactions will eventually include an MDR to make them more financially viable for banks.

Is Amazon going back to basics?

There's been some drama unfolding in Amazon's India operations recently. Manish Tiwary, who has headed Amazon's India operations since 2020, has decided to step down. According to an article by The Arc, two main reasons have led to his departure. First, Tiwary had disagreements with Amit Agarwal, his predecessor and senior, over Amazon’s India strategy. Second, Amazon has been losing market share in top Indian cities to quick-commerce companies in some categories.

Tiwary will remain with Amazon until October, which is crucial because of the festival sales season. Interestingly, Amazon hasn’t announced a replacement for him yet.

So why does this matter? Well, Amazon has recently been facing a significant threat of losing market share to quick-commerce players like BlinkIt and Zepto. These companies have started to sell not just groceries and daily needs but also electronics and apparel. Electronics, by the way, make up between 40% to 50% of all sales on Amazon and Flipkart.

Quick-commerce players are betting that Indian consumers will soon prefer quicker deliveries over traditional e-commerce. While this shift is already happening with groceries, it's still uncertain if consumers will prioritize convenience and higher prices over the lower prices they get on Amazon for other categories.

Although this is still a hypothesis, the rise and adoption of quick commerce have been impressive and can't be ignored. A leadership change at this point could be a significant blow for Amazon.

So far, Amazon has invested over 7 billion dollars into the Indian market, but its revenues are starting to flatten out. In FY23, Amazon’s business saw only a 3.4% revenue growth, while their marketplace entity saw losses increase by 33% to almost 5000 crores.

But it's not just about the numbers. Amazon is currently facing intense competition in both urban and rural India.

In urban areas, quick-commerce companies like BlinkIt, Swiggy Instamart, and Zepto are squeezing Amazon with their super-fast delivery promises. Meanwhile, in smaller towns, Flipkart and Meesho have established stronger footholds.

Meesho, especially, has seen phenomenal growth in the last few months. It recently surpassed Amazon in terms of monthly active users on its mobile app, meaning more Indians are spending time on Meesho’s app than on Amazon's.

According to Money Control, a top seller on Amazon recently said, “Amazon India's hunger to do business is nothing like it used to be earlier. The company has become extremely bureaucratic, and it no longer enjoys the edge it once had.”

However, it’s not all bad news for Amazon. With e-commerce getting tougher, they're shifting their focus toward their cash-generating cloud computing business, AWS. This is reflected in the numbers—AWS India's revenue grew by 43% in FY23, crossing 12000 crores.

For context, AWS is the world’s largest cloud-computing company with over 30% market share, and Amazon globally makes close to 100 billion dollars in revenue from it every year.

Despite the current challenges, Amazon remains bullish about its prospects in India. They plan to invest an additional 15 billion dollars into the country by 2030, with a massive 12.7 billion dollars dedicated to AWS alone. If the media reports are accurate, Amazon is also considering buying Swiggy's Instamart business to enter the quick commerce market.

Right now, it seems Amazon is leaning on its cash cow, AWS, to weather the storm while it figures out how to navigate the complexities of the Indian market.

There's a lot of excitement brewing in this space, and these business wars are likely to continue.?

What the Bangladesh chaos means for Indian investors

Until a few weeks ago, some people used to compare India’s per capita GDP with that of Bangladesh, often calling it an economic miracle because Bangladesh's per capita GDP was higher than India's. However, the country is now in turmoil.

Source: World Bank

There were massive protests, and Prime Minister Sheikh Hasina had to resign and flee to India. One big reason behind the protests was the quota system that students thought was unfair, leading to demands for change.

So, why should this matter to you as an Indian investor?

Bangladesh isn't just our neighbor; it's also one of our biggest trade partners in South Asia. Last financial year, India and Bangladesh had a bilateral trade worth 14 billion USD.

A major disruption in a country we regularly trade with is sure to affect multiple industries in India. Here’s how deep our ties with Bangladesh go:

• We have a cross-border pipeline supplying fuel to Bangladesh.
• Indian companies, like ONGC Videsh and Oil India, are involved in oil exploration there.
• We export about 1100 Megawatts of power to Bangladesh.
• India has committed loans worth almost $8 billion for various developmental purposes.

With the current crisis, things might get really messy, and we are already seeing signs. Perishable food exports, like onions, are taking a hit, and trains and flights are being canceled. It’s not just IndiGo; several major listed companies have varying degrees of exposure to Bangladesh. Here are a few:

• Marico, known for its Parachute hair oil, gets about 11-12% of its revenues from Bangladesh. Parachute coconut oil alone has an 80%+ market share there.
• Pearl Global Industries, a textile manufacturer, gets over 25% of its revenues from Bangladesh.
• Emami has a manufacturing facility in Bangladesh and gets about 5% of its revenues from the country.
• VIP Luggage has eight facilities in Bangladesh, contributing to 30-35% of its total production capacity.
• Hero MotoCorp has a joint venture and a manufacturing facility in Bangladesh, contributing 2-3% of its revenues. Ashok Leyland and Tata Motors also have some presence in the country.

But the industry that may be most affected, yet also potentially benefit, is the Indian textile industry.

The bad news is that 25-30% of India’s overall exports to Bangladesh are yarn, which Bangladesh uses to make textiles and export them globally. If this gets disrupted, it could be a big hit for us. Textiles are huge in Bangladesh, accounting for 80% of its overall exports and 15% of its GDP.

However, the good news is that with all this turmoil, global importers may start considering India a more reliable source of textiles. According to Business Standard, India could gain an additional $300-400 million per month if 10-11% of Bangladesh's exports are diverted to Indian hubs. This might explain why many Indian textile company stocks have gone up recently.

That said, this boost to Indian textile businesses is just speculation for now.

What we know for sure is that Bangladesh is in a tough spot right now, and we all hope and pray for the safety of the country and its citizens.

Will gold continue to shine?

We talk a lot about gold, and for a good reason—it keeps making headlines. If you remember, in the budget, the government slashed the customs duty on gold from 15% to 6%. This caused gold prices to drop sharply from about 7300 per gram to around 6700 per gram. Since then, prices have recovered to about 6900 per gram.

This sharp fall in prices predictably increased the demand for gold. The best sign of this is the fact that the Indian gold premium compared to international gold prices has disappeared. Over the past few years, Indian gold traded at a discount due to poor demand and high customs duties. But suddenly, the premium has vanished.

The fall in gold prices has led to an increase in demand for jewelry and other forms of gold. A recent Economic Times article reported that several jewelers are seeing double-digit increases in footfall since the prices dropped.

The cut in gold import duty comes just as India heads into the festive and wedding seasons. While it's hard to pinpoint the exact number of weddings in a given year, a recent Jefferies report estimated it at 80 lakh to 1 crore. The period from November to December tends to be one of the busiest for weddings, which also account for the bulk of jewelry purchases.

But the budget isn't the only tailwind for gold. Central banks have been one of the biggest sources of gold demand ever since the Russian invasion of Ukraine.

Source: SSGA

The World Gold Council recently released data for June, showing central banks bought 12 tons of gold. The RBI was one of the largest buyers, purchasing 9 tons and adding to the 800 tons it already holds.

To date, RBI is the second-largest buyer of gold after China, with nearly 38 tons purchased. Since 2022, central banks have bought nearly 2,500 tons of gold.

Source: World Gold Council

The World Gold Council also surveyed central banks, asking if they would add more gold to their reserves. Almost 30% of central banks said they would increase purchases, while 68% said they would make no changes. The three big reasons why central banks are buying gold are interest rates, inflation, and geopolitical concerns.

Source: World Gold Council

Gold will remain in focus this year because it typically has a negative relationship with interest rates. Also, remember that gold prices are set in dollars. The US Federal Reserve is widely expected to cut interest rates in September, if not sooner. So, if US interest rates fall, gold prices will get another boost.

More importantly, gold is seen as a hedge against geopolitical instability. If the Middle East continues to become more unstable or if outright war breaks out in the region, gold prices may continue to rally.

With all these factors in play, it’s clear that gold will remain a hot topic.

Indexation benefit is no longer mandatory for real estate

During this year's budget presentation, the government changed the taxation rules for properties sold in the country. This triggered a series of debates because it would result in people with long-term property holdings paying extra taxes.

But the good news is that recently, the government took these debates and suggestions into account and revised the rules for property taxation.

Before I explain the revised rule, let’s look at what the government initially proposed:

The government’s initial proposal aimed to reduce the tax on property sales from 20% to 12.5%, but without any indexation benefits.

Let me explain indexation with a simple example:

Imagine you bought a house in Mumbai in 2010 for 50 lakh rupees and decided to sell it in 2024 for 1 crore rupees. Without indexation, your profit is 1 crore minus 50 lakhs, which is 50 lakhs. So, you need to pay tax on this 50 lakh profit.

But with indexation, the calculation changes:

The government publishes a Cost Inflation Index (CII) for every area, every year. Let’s assume the CII for 2010 was 100, and for 2024, it was 150. This means that property prices have increased by 1.5 times since you purchased it due to inflation.

So, if indexation is applied, your buying cost for tax purposes isn’t considered 50 lakhs, but 50 lakhs * 1.5, which is 75 lakhs. Therefore, if you sell the property for 1 crore in 2024, your inflation-adjusted profit is 25 lakhs.

Under the previous tax rules, you would pay 20% tax on the 25 lakh profit, which is 5 lakhs.

However, the initial budget proposal suggested removing the indexation benefit while reducing the tax rate to 12.5%. Going back to our example, this means you would pay 12.5% tax on your overall 50 lakh profit, which is 6.25 lakhs!

The biggest concern here was that a higher effective tax in some cases might promote more unofficial transactions in the real estate market. This could reduce the government’s tax revenues in the long run and harm the economy.

In response to these concerns, the government recently revised the proposal.

As per the revised rules, property owners now have a choice between a 20% tax with indexation benefit and a 12.5% tax without indexation benefit. However, this choice is available only for properties bought before July 23, 2024.

So, depending on when you purchased your property, you now have the option to choose between two tax regimes, allowing you to pick whichever is more beneficial for you.

A new CPI basket

The Ministry of Statistics of India is considering revising the country’s Consumer Price Index (CPI) basket. They are thinking about reducing the weight of food by 8%, which could have significant implications. Let me explain the details.

First, let’s talk about what CPI actually is. CPI measures how prices change for a representative basket of goods and services that a typical household consumes. Every five years, the government surveys people to update this basket.

Right now, India’s CPI is based on spending patterns from 2011-2012, which is over a decade old. Economists say this outdated data is distorting our inflation numbers, which the Reserve Bank of India (RBI) uses to set interest rates. This is why there’s a push for change.

So, what’s changing? The Ministry is considering reducing the weight of food in the CPI by 8%. Currently, food and beverages make up 54.2% of the CPI basket. But we’re spending less on food relative to other things compared to a decade ago.

According to the recently released household consumption expenditure survey:

• The amount urban households spend on food has gone down from around 42% in 2011-12 to 39% in 2022-23.
• The amount rural households spend on food has decreased from about 53% in 2011-12 to 46% in 2022-23.

The Ministry is also considering updating the 299 items in the CPI. Some current items, like "horse cart fares" and "video cassettes," are quite outdated. Instead, they’re thinking about including things like smartphones and OTT consumption.

Why does this matter? In June 2024, the CPI was at 5.08%, with food prices rising by 9.36% year-on-year, driving much of our inflation.

Our chief economic advisor, V Anantha Nageswaran, argued that the RBI's inflation target should exclude food. He said food inflation is a supply-side problem, not a demand-side one, and monetary policy doesn’t do much to fix supply issues like bad weather or crop diseases. Think about it—how will high interest rates fix a bad monsoon or heatwaves?

The RBI has been keeping interest rates high because of high CPI, which is largely due to food inflation. But changing how we calculate CPI could change how the RBI sets interest rates.

These changes aren’t happening immediately—they will likely come into effect in January 2026. But when they do, it will affect everything from how we measure inflation to how the RBI sets monetary policy.