India needs a systematic policy on direct selling industry

Here's an interesting article by Professor Bibek Debroy's report on India's direct selling industry. The report, released by Indicus Analytics, examines the size of India's direct selling industry, its growing significance in the economy and the key policy issues plaguing the growth of this industry.

   

INDIA NEEDS A SYSTEMATIC POLICY ON DIRECT SELLING INDUSTRY

India needs to have a specific statute that regulates and facilitates direct selling industry like other fast growing economies such as Thailand, Malaysisa, Korea, Indonesia, Chaina, Vietnam, Japan, Taiwan and Singapore.

Recent draft guidelines issued to the States has the potential of rendering many important sales and marketing activities like insurance and trade as illegal. Given the importance of the direct selling industry, a fresh piece of legislation is needed. Tinkering with sections and amending them here and there to cater to a new need is often a bad idea, because such amendments fail to take a holistic view. 

Economic policy framework legislation needs to be evenly spread across the country, and therefore the central Government needs to enact a policy for the direct selling and multi-level-marketing industry.
Direct selling today, accounts for 35.8% of non-store retail sales, 4.41% of organized retail sales and 0.07% of GDP. Therefore, direct selling is going to increase in importance in India.

Indicus Analytics, India's premier economics research firm has released a study "Direct Selling in India: Appropriate Regulation Is The Key". The study has been authored by renowned economist, Professor Bibek Debroy.

TheStudy has raiseda number of crucial issues facing the Direct Selling (DS) industry in India.

Demanding operational clarification and clear distinction at the central level, the Study urges amendment of the Prize, Chits and Money Circulation Schemes (Banning) Act, by:

(a)    First, defining Direct Selling including Multi-level marketing(b)   Second, there needs to be an explicit qualification explaining that direct selling is not to be interpreted as a money circulation scheme
(c)    Third, a Pyramid scheme has to be defined, so that people know what is being prohibited. This will protect direct selling companies, protect consumers and facilitate enforcement.

The Study observes that there are empirical reasons for the growing importance of direct selling in India:

The number of direct sellers is estimated to be almost 4 million in 2010-11.   For that same year, sales revenue was estimated at Rs. 6300 crore (1149 million US dollars), accounting for 35.8% of non-store retail sales, 4.41% of organized retail sales and 0.07% of GDP. Therefore, logically, three propositions do follow.  First, direct selling is going to increase in importance in India.  Second, it will provide an additional source of employment, often part-time and often to women.  Third, its contribution to tax revenue will also increase.  These are empirical propositions, not theoretical. 

As an additional channel, it can lead to disintermediation, reduction in transaction costs and bridging the gap between consumer prices and manufacturer prices.

According to Dr. Bibek Debroy, who has authored the Study, "Surprisingly, the Government of India has failed to catch the nuances of the Direct Selling business vs. Pyramid Schemes putting the entire machinery to scrutiny and confusion among the companies, state level regulators, judiciary and the direct sellers themselves."

He argues in the Study that, "Policy and legislation that do not adequately understand the nuance of any industry have the potential of not only adversely impacting that industry, but other complementary upstream and downstream industries as well. Overall, India needs a more systematic policy on DS that is based on its own constitutional structure and also the realities and idiosyncrasies of the Indian economy".

According to the study, in India "direct sales and multi-level-marketing are all being inadvertently bracketed with pyramid and Ponzy schemes; consequently consumer protection considerations are being imposed on perfectly legitimate and beneficial economic activities with significant positive externalities.  The adverse outcomes of such flawed policy could be many - increase in cost of sales, reduced competition, greater inefficiencies and increased cost of entry for new firms being some.  Not only developed, even fast growing developing countries have recognized this and have drafted a facilitative structure for Direct Sales and Multi-level Marketing that clearly distinguishes them from Pyramid schemes."

"However, recent draft guidelines issued to the states show no such vision; they could be construed to be describing direct product sales as disguised form of a pyramid / money circulation schemes.  This only reflects that policy-makers need to better understand the nuances of the DS and MLM industry, and also appreciate its current and potential importance.  It is critical for the government to understand that any economic activity that is based on ‘regular consumption of real consumable goods or services', irrespective of the cost of the goods, cannot be simplistically classified as a ‘disguised form of money circulation'."

"The current draft guidelines envisage eliminating all direct selling activity where the entity higher in the hierarchy is able to earn commission's basis the sales efforts of those down the line, without having to work equally hard. This is of course a rather naïve form of identifying an undesirable or undesirable economic activity – by this route insurance agents, almost all of trade, and most forms of economic activity could be considered to be undesirable."

"It is obvious that direct selling and MLM are forms of economic activity that could play a very important role in a country like India.  These are low transaction cost mechanisms for sales that have a very high value added component, and are not very resource intensive unlike other forms of sales. Unlike business models, however, the economic policy framework needs to be evenly spread across the country, and therefore the central government needs to play a leadership role in many areas.  DS and MLM is one such domain, since sales and marketing in the new economy will necessarily be many times across borders, a common framework would help in creating a fracture-less marketplace."

"Many countries in the world (Singapore, Malaysia, United Kingdom, United States, Thailand, Malaysia, Korea, Indonesia, China, Vietnam, Japan, Taiwan, Singapore) have specific pieces of legislation on direct selling. For example, these cover conduct towards consumers, conduct towards direct sellers and conduct towards companies.  One must also remember that direct selling need not always be B2C.  It can also be B2B.  If one scans the legislation in these different countries, they generally tend to involve a licensing cum registration system for direct sellers, prohibitions on certain categories of products, restrictions on collecting money, a cooling-off period (during which consumers can cancel the contract), restrictions on multi-level marketing modes and prohibitions on pyramid schemes."

The Study further debates that "There is thus recognition that there is a double kind of problem.  First, stated explicitly, companies indulging in pyramid structure marketing schemes were claiming exemption from the Prize, Chits and Money Circulation Schemes (Banning) Act.  Second, left implicit and not explicitly stated, since direct selling can also be multi-level, companies indulging in multi-level marketing were being equated with those that dabbled in pyramid structures.  In pyramid structures, people are persuaded to join and pay money, because they gain from the payments made by people who join later.  In practice, it shouldn't be difficult to distinguish between the two.  For instance, there is often no clear product in a pyramid structure and commissions are paid on registration and entry fees, not on sales of products.  Even if there is a product, it may be of dubious value.  Having said this, does the Prize, Chits and Money Circulation Schemes (Banning) Act clearly distinguish between the two, without having to go in for judicial interpretation?"

"In addition to amending the Prize, Chits and Money Circulation Schemes (Banning) Act, it is also necessary to amend the Consumer Protection Act.  For instance, Section 2® of the Consumer Protection Act is against unfair practices and "unfair trade practice means a trade practice which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice including any of the following practices… ". Although this listing is meant to be indicative and not exhaustive, it is sometimes interpreted as being exhaustive, the point being that a pyramid scheme is not explicitly mentioned as an unfair trade practice."

These two amendments are the bare minimum that is necessary.  However, there is a reason why these have been described as a second-best solution.  Laws are enacted at various points in time, to cater to a specific need.  Tinkering with sections and amending them here and there, to cater to a new need, is often a bad idea.  Such amendments fail to take a holistic view.  Given the importance of the direct selling industry, an importance that is only likely to increase in the future, a fresh piece of legislation is needed.

About Indicus Analytics

Indicus Analytics was established in December 2000 and has since become India's premier economics research firm. National and International corporate bodies, industry associations, governments, academia and media houses have used our research to better understand the Indian economy and markets. Our multidisciplinary team draws from the analytical inputs developed in several fields – economics, statistics, demography, management, engineering, sociology, etc. We have been servicing a range of Internationally renowned organizations such as World Bank and various UN organizations, academia such as Harvard, Stanford and Cambridge Universities, government organizations such as Finance Commission, Competition Commission of India and Reserve Bank of India, top media houses such as India Today group, Outlook group, Indian Express group, and the topmost national and multinational companies.

About Dr. Bibek Debroy

Professor Bibek Debroy is an eminent Indian economist and currently a Research Professor at the Centre for Policy Research, New Delhi. His past positions include the Director of the Rajiv Gandhi Institute for Contemporary Studies, Consultant to the Department of Economic Affairs of Finance Ministry, Secretary General of PHD Chamber of Commerce and Industry and Director of the project LARGE (Legal Adjustments and Reforms for Globalising the Economy). Professor Debroy has authored several books, papers and popular articles, has been the Consulting Editor of Indian financial and other newspapers. He has done extensive research on economic policy, law, regulation and states.