What is India's ONDC (Open Network for Digital Commerce)?

India's ONDC is established to democratize and create a level-playing field for e-commerce superpowers.

ONDC was incorporated by the Department for Promotion of Industry and Internal Trade (DPIIT) as a private non-profit (Section-8) company to establish the public digital infrastructure to expand access to India's e-commerce ecosystem and offer alternatives to proprietary e-commerce sites.?

Since ONDC will not follow a platform-centric model, the Indian government hopes it will democratize the country's online market for all buyers and sellers, irrespective of their size, so that millions of small retailers and mom-and-pop (Kirana) stores get an equal opportunity. ONDC is the answer to end the abuse of the aggregators' superpower - a prospective alternative to dominant global giants Amazon.com and Walmart's Flipkart in its fastest-growing e-commerce market globally.

The ONDC will provide equal opportunities to all marketplace players, including consumers. It is a neutral platform that will set protocols for cataloguing, vendor match, and price discovery on an open-source basis, like the Unified Payments Interface (UPI). ONDC aims at fostering open networks developed on open-sourced methodology, using open specifications and network protocols, and independent of any specific platform. ONDC is expected to digitize the entire value chain, standardize operations, foster suppliers' inclusion, usher in logistics efficiency, and augment consumer value.

Large e-commerce firms have protested as they have already invested heavily in the R&D and deployment of their processes and technology. Yet, the government likely considers India's e-commerce market value – estimated to reach US$200 billion by 2027 by Statista – significant enough for the participation and engagement of all types of business competitors. Indian retail giants like Reliance and Tata have also launched retail platforms, shopping apps, and super apps. Currently, online retail accounts for about six per cent of India's overall retail market, but traditional retailers and merchants are aware of how rapidly this could change and do not wish to be locked out or priced out. With 800 million smartphone users, India's appeal to global retailers is also not easily dismissed.

Meanwhile, the Competition Commission of India raided the offices of top sellers on Amazon and Flipkart on April 28, coincidentally a day before the ONDC was launched. The move was?reportedly ?triggered by complaints from local traders who accused the marketplace platforms of deep discounting, predatory pricing, collusion with corporate sellers, and owning the inventory they sold via a holding company network. Let me explain; in India, there are two models of e-commerce through which these companies operate. The first is the inventory model, and the second is the marketplace model.?

In the marketplace model, there are independent buyers and sellers, and the e-commerce company merely acts as a platform to connect them through their website and mobile app. On the other hand, in the Inventory model, the company procures products in massive quantities from the sellers for ultra-cheap rates to sell them directly to the consumers. E.g., If a bookseller makes a book in 150/- and sells it on Amazon or Flipkart at 450 rupees; in this case, Amazon or Flipkart acts as the platform, they will generate a revenue of 112/- to 150/- and this amount also includes packaging and transportation charges. Therefore it leaves significantly less scope for profits.?

However, if Amazon or Flipkart operates in the inventory model, they will buy 10,000 books from the bookseller at once and then use their bargaining power to purchase the books at just 200/- per book. After that, they will keep these books in their warehouse eventually to sell them at 450/- on their website. This way, these e-commerce giants generate revenue of 250/- per book with small inventory costs. Therefore, they get 100/- extra in revenue even for something as small as books.?

Furthermore, when this is done for huge products that cost 10,000/- or 20,000/-, the revenue difference skyrockets by a billion dollars. Therefore using the inventory model, the e-commerce giants generate way more profit as compared to the marketplace model. This clearly outlines that if the e-commerce company has to make money, they will, by default, have to buy products at a very low price and later increase their margins.?

In case of Amazon, it has two companies called Appario Retail and Cloudtail. These companies are nothing but huge sellers through whom Amazon bought its products, stored them and sold them in the market. An investigation report stated that Cloudtail and Appario Retail alone contributed to 35% of the total sales on Amazon India, and they even used these sellers to strike exclusive deals with smartphone companies like Apple, Xiaomi and other tech companies to outplay both smaller players and their rivals.?

In 2016, the government of India came up with a regulation which stated that Amazon and other foreign e-commerce companies cannot use the inventory model and must use the marketplace model to operate in India. But, despite the regulations, the superpowers always found a way to make their money—so the dire need to protect and promote the MSMEs. Hence the prime reason for the ONDC initiative to kick-off and next was the deep discounting they were offering on different products, which has directly affected the brick-and-mortar stores that cannot match these deep discounts.?

Lastly, the imitation game of e-commerce platforms. Amazon has been investigated in US, Europe and India for alleged anti-competitive practices that hurt other businesses. Likewise, Amzon.com has repeatedly been accused of knocking off sellers' products in its marketplace and rigging search results by exploiting its vast trove of data to promote its own merchandise at the expense of other sellers.?

Once the ONDC is implemented and mandated, as expected by August 2022, all e-commerce companies in India will have to operate using the same processes, akin to Android-based mobile devices, irrespective of the brand. This would provide a boost to smaller online retailers as well as new entrants by ushering in interoperability, discoverability, and inclusivity. Moreover, it will empower consumers and suppliers by breaking the monopoly of giant platforms to drive innovation and transform businesses in sectors like food, retail, and mobility. ONDC will provide three primary functions: discoverability, open protocol for e-commerce platform & interoperability and price comparison.?

Twenty government and private organizations have?confirmed ?investments worth INR 2.55 billion (US$33.34 million). In addition, several public and private sector banks, such as HDFC, Kotak Mahindra, Axis Bank, State Bank of India (SBI), and Punjab National Bank (PNB), have picked up stakes in ONDC. Axis Bank, HDFC, SBI, and Kotak Mahindra has acquired a share of 7.84 per cent each by individually investing INR 100 million (US$1.3 million) to purchase 10,00,000 equity shares of the face value of INR 100 each. Earlier in November 2021, PNB had announced its plans to buy a 9.5 per cent share in ONDC.

Around 80 firms are working to integrate market players with the ONDC platform. The Economic Times reports that these firms are making enterprise software and apps for sellers, buyers, logistics platforms, and payment gateways.?Meanwhile,?The Business Standard?has?reported ?that 24 companies, including high-profile startups like Flipkart's logistics arm eKart Logistics, hyperlocal delivery startup Dunzo, and payment service provider PhonePe, are in the process of integrating with ONDC.

To summarize, the ONDC initiative has been acknowledged as necessary to end the dominance of behemoth platforms like Amazon and Flipkart that have been accused by the government of exercising monopoly, contrary to the law. However, there will be many challenges in creating a fair playing field for all players to co-exist simultaneously and benefit mutually.?