Tuesday, July 19, 2016
Don’t Shackle the New Economy with the Restrictions of the Old: Vivan Sharan in The Wire, 11 July 2016
There is a perpetual tussle between the old and the new. Perhaps nothing exemplifies this better than the tensions between the old economy and the new economy. A large share of the billions of dollars of foreign investments into India are now linked to the new economy. The new economy in turn is one that benefits from the freer movement of capital that has been enabled through a gradual opening up of our domestic market. And this capital is ruthless. It is attracted by productivity and efficiency, and not the populist impulses of our political class. Conversely, the old economy does seem to care about social equity – insofar as at least giving back through entrenched political patronage. A number of fallacies persist in the manner in which the old is pitted against the new – and recent debates on Uber versus traditional taxi operators illustrate this.
Perhaps the biggest fallacy is that there are no common traits between old and new economy businesses. Of course, both aim to maximise profit, albeit through different means. Old economy businesses rely on high barriers to entry, which in the case of traditional taxi services are achieved through manipulation of the political economy. Anyone attempting to use community parking spots in Delhi for instance, would quickly realise that taxi stand operators have managed to appropriate space in a number of them, by paying ‘rent’ to the local officials. No doubt the cost of this rent is lower than that which would have to be paid if this were a formal levy.
On the other hand, new economy businesses such as Uber, rely on the sheer efficiency of technology to minimise costs. A nifty mobile application matches demand and supply in the taxi market, through an interactive experience that both the driver and the rider can use. There should be no mistaking the fact that the objective of any technology that is applied commercially is to create a monopoly of some form. And this is enabled through intellectual property laws that are widely recognised as essential for innovation, with some governments also complicit in perpetuating this virtuous cycle. Indeed, old and new economy businesses have different ways to achieve the same objective of achieving some form of monopoly in a product or a service value chain. And it remains incumbent on the government to regulate monopoly formation through appropriate regulatory mechanisms – whether for the old or for the new.
Another fallacy worth pointing out is that foreign capital is very different from domestic capital in its ruthlessness. The first quarter of the 2016-17 fiscal year has already witnessed the highest capital raise through initial public offerings (IPOs) in India in nine years. While the sum is a relatively paltry Rs. 5,855 crores (less than a billion dollars), capital allocation patterns are illustrative of this fallacy. Three out the six of the companies that participated in these IPOs were previously funded through private equity or venture capital investments, which are in turn intrinsically linked to capital availability in the global markets. Distinguishing between foreign and domestic capital, at some level or the other, is a fool’s game. If India has chosen not to remain isolated from global markets, it is incumbent upon policymakers to make capital available for domestic enterprise to flourish.
So how can policymakers resolve this regulatory debate? One would imagine that a first step would be to reduce entry barriers, including licenses wherever possible, in order to foster competition. This should include doing what it takes to increase access to capital as well as removal of arbitrary pre-conditions at every step. Instead, state governments are busy figuring out how entry barriers to technologically-enabled businesses can be made higher. Karnataka for instance, has issued “On-demand Transportation Technology Aggregators Rules, 2016”; wherein one of pre-conditions is that licensees should have a minimum of 100 taxis in their fleet. This is perhaps not the best way to ‘Start-Up India’.
An alternative could be to first revisit and reconcile existing regulations and to focus on institutional capacity building within government while finding ways to enforce transparency. It is neither the moral responsibility of the private sector to think beyond its stakeholders, nor is it the task of governments to save the old economy from disruptions. It is however necessary for technology-driven businesses to be transparent given their inherent complexities; and in turn for governments to manage inevitable transitions from old to new by through some useful form of ‘co-regulation’ that empowers consumers.
The ability of government or for that matter, the judiciary, to regulate dynamic sectors is limited – most recently evidenced in the call-drop case wherein the judgement states that telecom operators should not be penalised for bad quality of service since the faults cannot be “traceable exclusively” to them. Consumer experiences can easily prove otherwise and therefore should be used as a metric within the regulatory paradigm.
The author is a partner at Koan Advisory Group.
Wednesday, July 6, 2016
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It has been two years since the last general elections and currently a range of assessments of the Modi government’s performance are dominating headlines. Despite the recent debate between the finance minister and the central bank governor on whether or not India is a “one-eyed king in the land of the blind’’, it is clear that for foreign investors, the country’s growth is exceptional. Evidence for this is in the equity inflows over 2015-16, which touched around $41 billion, up from around $32 billion in 2014-15.
While the final data is awaited, a large share of equity inflows were targeted at service industries. Therefore, FDI growth is not yet a cause for ‘Make-in-India’ triumphalism. Rather, trends indicate that ‘Service-in-India’ is where investor interest really lies. And within the services sector, e-commerce and other over-the-top (OTT) services have attracted among the largest shares of inbound capital. This poses challenges for Mr. Modi’s policy makers at multiple levels particularly since technologies are not static, unlike the policies that circumscribe them. Moreover, disruptive innovation is a concept that is still far from understood by government.
The Department of Industrial Policy and Promotion’s (DIPP) recent guidelines for FDI in e-commerce are a case in point. The policy finally recognises multi-crore investments by e-commerce companies in the “marketplace” model as legitimate; by allowing FDI in “business to business e-commerce”. Buyers and sellers transact on e-commerce marketplaces directly, facilitated by technology platforms that underpin them. Such clarity on whether FDI is allowed should ordinarily be cause for celebration. However, problems remain.
The DIPP’s policy pronouncement came with strings attached – marketplace companies cannot “directly” or “indirectly” affect the price of products sold through their proprietary platforms. The net result will be that only companies that are backed by investors with deep pockets will be able to survive. Litigation will inevitably ensure, on subjective interpretations of “directly” and “indirectly” and courts will be relied upon to define economic policy. This is something that the finance minister has spoken out against in his recent comments on taxation policies and the active role of the judiciary, and yet there is dissonance within government.
One of the main reasons why brick and mortar retail purportedly cannot compete with e-commerce is the heavy product discounting on internet marketplaces. This is linked to economic logic – if a seller does not need to keep a large inventory as is the case in a dynamic marketplace, lower business costs allow the margins for discounting. These discounts also derive from large marketing budgets of e-commerce incumbents with foreign investors. Consequently, sellers do not have to spend a dime on the most critical function of frontend retail. So what happens to the small retailer?
Whatever happens should in no case be decided through courts or committees of government. It should be decided through fair competition and transparency in the business ecosystem. Both the small and large players in retail should do their part to allow for this. Large businesses must utilise their technological prowess to create channels of reporting and feedback, that can lead to a clearer understanding of transactions, taxation and all other grey areas as government sees them. The reluctance on part of big businesses to share data is an untenable 20th century legacy. And small businesses should simply evolve by adopting technology wherever possible. Nothing stops small retailers from selling on internet platforms; either their own or those offered by incumbent e-commerce companies that have managed to integrate thousands of small sellers already.
A favourite quote of many “India watchers” is that whatever you can think of the country, the opposite also holds true. This also seems to be the case in India’s business ecosystem, technology centric services included. For instance, large telecom service providers (TSPs) have been lobbying for differential pricing of “Over the Top” (OTT) services on the internet. That is, they have been demanding government intervention in pricing of internet services, based on usage of different consumer applications. To be clear, this is a case of the private sector asking policymakers to regulate the best level playing field for businesses that exists today; the internet.
Conversely of course, technology entrepreneurs contend that differential pricing should not be allowed as it will kill competition and a free internet. As a result of this debate, the Telecom Regulatory Authority of India (TRAI) has been busy taking wildly differing positions over the issue. A year ago, TRAI was accused of favouring TSPs, whereas today, it seems to have taken a more considered stance in favour of keeping the internet unfettered. At the core of the TSPs’ demands are an inherent inability to provide OTT services that can compete with rapid innovation. For instance, TSPs fear revenue losses owing to voice over internet protocol based international calling.
The question to ponder over is: whether a sustainable solution to competitiveness concerns such as those raised by small retailers or large TSPs, is more regulation? What are the origins of some of the largest internet based service companies in the world? The answer to the latter is that many of them were not necessarily Internet-focussed from the start, but adapted to changing realities.
Disruptive innovations enhance competitiveness in a way that protectionism in any form cannot. In India, a predominantly young country reliant on the service sector, the inexorable role of technology in business and job creation, should not be undermined by myopic regulation. Technology in turn can help leapfrog some of the seemingly intractable challenges the country faces today including in education and healthcare delivery. India’s growth may be unique, but the Modi government should recognise that so are its stark socio-economic circumstances that must be overcome.
In the case of the internet, the role of government should be limited to provision of secure and resilient digital infrastructure for universal access (whatever happened to ‘BharatNet’?); as well as to demand from businesses, as much transparency as technology allows.
*Vivan Sharan is a Partner at Koan Advisory Group.