Friday, November 16, 2018

"Reinterpreting public interest broadcasting", Vivan Sharan, LiveMint, 09 November 2018

Populist politics tends to lead to short-term policy goals in most democracies. This is why many economic policies aim at instant consumer gratification in India—and explains why even minimal fuel price cuts regularly make headlines. Part of the job of a responsible bureaucracy is to espouse more balanced public interest objectives. This includes acknowledging the fact that the long-term welfare of market participants such as producers and intermediaries also affects consumers. However, line ministries like the ministry of information and broadcasting (MIB) often fail to perform this balancing act for the markets they govern. 
Unenviably, the MIB functions as a licensor in a broadcasting market where there are hundreds of private operators spanning print, television and radio. The need for economic liberalization three decades ago had already confirmed that licences are inimical to market growth. Today, licencing is reminiscent of a bygone era of acute market scarcities. Additionally, the internet has rapidly democratized consumer access to content markets globally, outside of any such licencing paradigm. Yet, the MIB shows a persistent bias towards licencing-inspired interventions to stay relevant. For example, its latest rulemaking initiative may permanently distort the market for sports broadcasting in India. 
Specifically, the MIB plans to introduce a legislative amendment to force content owners to share live sports signals deemed to be of “National Importance” with the public broadcaster, Prasar Bharati, for re-transmission over private TV distribution networks. It would do so through the relevant Doordarshan channels. A public consultation document has been floated by the MIB in mid-October to this effect. 
TV broadcasts are carried to over 150 million homes by private cable and satellite distribution networks. Another 30 million homes access public-service broadcasts through direct to home and terrestrial networks owned by Prasar Bharati. The Sports Broadcasting Signals Act, 2007 (“the Act”) which the MIB wishes to amend, was promulgated to make sports-broadcasts of “national importance” available to low-income homes. Simultaneously, all distributors are mandated to carry Doordarshan channels by an older law governing private networks. Until recently, Prasar Bharati chose to employ a combined interpretation of both laws to retransmit sports broadcasts acquired under the Act through public and private networks. 
However, in August 2017, the Supreme Court clarified the obligation of content owners as being limited to sharing of sports signals for re-transmission only over Prasar Bharati’s networks. The MIB now seeks to bypass this judicial interpretation, in order “to ensure access to the largest number of viewers”. This motive is suspect because free sports programming of national interest is already made available on the airwaves under the Act. Any lack of consumption of free programming is simply a function of consumer choice in favour of private networks. It is safe to assume that households which can pay for private networks can easily put an additional dish or antenna to access free sports programming. 
Conversely, if a live signal is carried simultaneously on both paid and free TV, advertisers would naturally pay less for their time slots on private networks, eroding the margins of businesses which own the underlying content. And Prasar Bharati would see a windfall without taking any production risk because live sporting events would draw greater advertising revenues than its usual repertoire of content.
Reducing the scope for monetising privately-held intellectual property (IP) is akin to throttling the lifeline of the sports economy in India—a fact not unknown to the MIB. Prasar Bharati had negotiated acquisition of five-year rights to broadcast Indian cricket matches for a paltry sum of ₹227 crore in 1999 with the BCCI, whereas a similar set of rights were subsequently sold for about 12 times this value to a private broadcaster in 2006. A panic-struck MIB pre-empted its inability to compete in an open market, and issued an ordinance which served as a precursor to the 2007 Act. 
IP rights for broadcasting account for well over 85% of hockey and football revenues too. The growth of regional sporting leagues which has finally made sports a viable career is fuelled by similar economics. Owing to limited scope for scaling up government expenditure, most future investments in local sports be private sector driven. The global sports market is already worth around 1% of gross domestic product (GDP), whereas the annual ‘Khelo India’ cash outlay works out to less than 0.04% of India’s GDP.
Unfortunately, the creation of market value spurs predatory impulses within corresponding line ministries. Consequently, the MIB is interpreting public interest narrowly and in self-interest—by forcibly acquiring private IP for profit. Prasar Bharati barely generates enough revenue to cover its own programming costs—and is dependent on heavy grants from the MIB. Re-transmitting the IP owned by others will perpetuate this culture of handouts rather than stimulate any impetus towards creating quality public-service content. Prasar Bharati may soon become completely unable to overcome its structural deficits, like many other publicly-owned body corporates. This would leave Indian consumers worse-off in the long run, even as the proposed legislative amendment nips the growth of the nascent sports economy in the bud. 
Vivan Sharan is a Partner at Koan Advisory Group, New Delhi. These are is personal views.

Trade Policies Should Define Digital Products to Enable and Negotiate Market Access, Vivan Sharan and Mohit Kalawatia, FirstPost, 06 November 2018

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A host of export-services have gained prominence in India, especially since service providers now leverage technology to access geographically remote markets. Most of India’s prominent export-services are knowledge and skill intensive and can be delivered electronically. The delivery of such services has also garnered the attention of trade negotiators globally.
For instance, India is in the midst of negotiating e-commerce related issues within the proposed Regional Comprehensive Economic Partnership (RCEP)  a mega-regional trade-pact involving ASEAN countries, India, China, Australia, Japan, South-Korea and New-Zealand. A key issue being discussed here is the treatment of ‘digital products’  products which were formerly delivered in tangible form but now can be delivered in electronic form.
While no international consensus has been reached, several bilateral trade agreements already define digital products. India’s own approach as with most technology policy questions has been piecemeal.
The Singapore-Australia free trade agreement (FTA) which came into force in 2003, was among the first bilateral pacts to contain trade obligations linked to digital products. Thereafter, as e-commerce provisions started appearing more frequently in trade agreements, such obligations became increasingly prevalent globally. For instance, the India-Singapore Comprehensive Economic Co-operation Agreement inked in 2005 contains provisions related to digital products. Herein, the term is defined expansively to include all services or products that can be delivered electronically. Categories of such products include audio-visual content, e-books, text services such as e-mail and software. Replicating such a broad definition in future trade agreements will implicate the wider domain of knowledge and skill intensive services.
With renewed momentum towards formal negotiations on e-commerce at the WTO, advanced countries such as the US, Australia, Japan, and Singapore are in favour of an all-encompassing definition of digital products. Conversely, in private discussions, Indian officials have raised concerns about the potential loss in customs revenues owing to new technologies such as additive manufacturing (3D printing) within the construct of digital products. As per a 1998 WTO Work Programme on e-commerce, of which India is a part, electronic transmissions are exempt from such tariffs.
Notably, existing domestic statutes including the Information Technology Act do not define digital products, and consequently, the bilateral agreement with Singapore serves as the only precedent in the Indian context. While the 2016 FDI Policy on e-commerce makes a passing mention of digital products, details on the types of goods and services which qualify as such are conspicuously absent.
To be clear, India needs to define digital products, in order to better negotiate market access for its service industries in future trade agreements. In 2017, India’s share in global merchandise exports stood at 1.7 percent, whereas its contribution to global services exports was 4.6 percent.
Notably, the World Intellectual Property Organisation’s Innovation Index, 2018, and the WTO’s World Trade Statistical Review, 2018, ranked India first and second in the export of ‘ICT-services’ and ‘computer-services’ respectively.  Additionally, the emergence of global value chains has increased opportunities for specialisation in services. Even as China continues to dominate merchandise supply chains, India can potentially position itself as a hub for services by leveraging e-commerce, including manufacturing-linked services such as design and refurbishment.
Adopting a broad definition of digital products would bring new technologies within the regulatory fold, is unlikely to yield optimal economic outcomes. For instance, circumscribing 3D printing through an entirely new policy on digital products may be premature and may inadvertently compromise the development of local supply chain capacities for the same. Perhaps a similar realisation led to the shelving of the e-commerce policy. However, the absence of trade rules on digital products altogether could mean future regulatory uncertainty for Indian service providers in accessing global markets. While there is no silver bullet, it is imperative to begin a balanced conversation on digital products in earnest.
Some useful ideas have already been put on the table through the consultations on the aforementioned e-commerce policy, conducted earlier this year. For instance, India can seek customs carve-outs for digital products which require conversion to physical form. This will address revenue concerns linked to 3D printing.
Additionally, India can adopt a ‘negative-list approach’ in tariff notifications, wherein services/goods which shall remain outside the ambit of the definition of digital products can be explicitly spelt out. This approach can also potentially enable periodic reviews of the commitments undertaken for such products under future trade commitments.
Commerce Minister Prabhu recently announced that his Ministry is formulating a comprehensive strategy to double India’s exports by 2025. This is an ambitious target which would rely heavily on the performance of 12 “Champion” export-service industries, identified under a Cabinet Action Plan in February.
If India wants low tariff thresholds to harness export markets, it will have to envision a similar reciprocal regime for service imports. Unlike manufacturing, in which India was unable to build export-competitiveness, it still has time to ensure that future trade rules align with its innate economic strengths in export-services.
The authors are technology policy experts at Koan Advisory Group, New Delhi.

Monday, November 5, 2018

Vivan Sharan moderates panel on "India Online", at FICCI Fast Track India Summit, 1st November, 2018


The digital economy is receiving a lot of attention of late. The recently approved National Digital Communications Policy 2018, an imminent data protection law, and policy conversations on e-commerce are examples of this. The public interest implications of rapid internet adoption are driving this momentum. Internet adoption displays an S-shaped curve globally – representing initial moderate growth, steep growth in the middle-phases and stable growth towards the end. The plummeting cost of data and devices seem to have catapulted India to the middle of this curve, a path of frenetic activity, and equally of heightened risks.
In many ways, the pace and pattern of internet adoption in India seem to mirror the process of urbanisation which has been equally feverish for longer. The prospects of efficiency, connectivity and progress have driven urban migration, and are the drivers of digital migration as well. A citizen experiencing in-situ urbanisation is similar to a digital native experiencing swift and inexorable technological change. Finding itself amidst such fundamental transitions, the Indian State is trying to discover legitimate levers of regulatory control, balancing consumer aspirations with the security and stability of the digital ecosystem.
This balancing act is going to be particularly hard when it comes to regulating device ecosystems. Smartphones are at the epicentre of consumer aspirations, with low-cost Chinese brands accounting for nearly 60 percent of the Indian smartphone market. These brands manage to offer hardware specifications comparable to higher-end smartphones and remain profitable despite unfavourable customs duties for equipment imports and lack of a localised components base. But there is a trade-off. Specifically, low-cost brands derive their margins by bundling applications, operating systems, and user consent – a combination that facilitates cross-subsidisation at the cost of ecosystem integrity, as explained below.
Firstly, many low-cost smartphone brands pre-bundle third-party applications that range from news aggregators to social media services. Such pre-installed software, also called “bloatware” in technology circles, not only takes up an asymmetric amount of processing memory relative to functionality, it often creates ecosystem vulnerabilities. For instance, according to a Pew Research Center study, the most common permission sought by application providers is to access information related to Wi-Fi connections. Such requests can enable access to device data from an entire network, with only one user’s permission. Digital advertising, unfortunately, thrives on such unethical collection of data. And the companies that make data-collection applications, in turn, cross-subsidise device makers. This grand-bargain of pre-bundling deprives users of any choice in the matter.
A second challenge is the prevalent practice of pre-bundling of older generation operating systems (OS) on low-cost smartphones. Again, owing to their own unit economics, smartphone makers often make important qualitative choices of behalf of unsuspecting users. This is problematic because low-cost devices running old software on cheap chipsets, often form the weakest link in interconnected digital communications ecosystems. This challenge is exacerbated by the fact that a single OS provider accounts for 90 percent of the mobile-OS market in India. Earlier this year, a comprehensive study by German researchers found that low-cost smartphone brands running this OS often failed to update relevant software patches that guarantee user-security.
Additionally, there is little monetary incentive for OS providers to indefinitely support their old products. Low-cost device manufacturers, on the other hand, benefit from installing old systems, which are naturally cheaper as the level of support offered by OS providers is minimal. Indians have already suffered significant financial harm owing to the prevalent use of outdated OS on ATM machines. Consequently, the Reserve Bank of India mandated “immediate action” to control vulnerabilities from unsupported versions of OS running on ATMs, in June this year.
Lastly, some smartphone manufacturers bundle the consent provided by users while first accessing their devices, with blanket permissions given to pre-bundled software, aggravating the aforementioned risks. India’s imminent data protection law is expected to mandate separation of such consent requests from the standard device-level service terms and conditions. Although this is a commendable step, it may not reduce take-it-or-leave-it consent propositions. This is because consumers tend to value convenience over security, expecting established brands to underwrite their security.
It is evident that disallowing pre-bundling practices may lead to higher costs being passed on to consumers. This may not be a politically acceptable outcome. Therefore, India must rely on setting requisite quality standards for smartphones. Several international templates exist for this, such as ISO-approved Common Criteria standards. However, the sheer pace of digital adoption means that enforcement of such standards will remain challenging until the requisite testing infrastructure is developed. In fact, implementation of a comprehensive regime for mandatory certification and testing of smartphones and other devices, envisioned by the Department of Telecom, has been inordinately delayed owing to this infrastructural gap. This is an opportunity for building deeper public-private partnerships for Digital India, much like Smart-Cities, and scaling up testing infrastructure. Industry must participate meaningfully in building such capacity, a process that perhaps remains contingent on the State articulating a multi-stakeholder approach towards digital economy regulation.
Vivan Sharan is a Partner at Koan Advisory Group, New Delhi. The views expressed here are personal.

Vivan Sharan speaks to Mirrow Now on quotas for Private Sector Jobs, 25 September 2018

"The perils of digital protectionism", Vivan Sharan, Live Mint, 17th September, 2018

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Nearly three decades since the balance of payments crisis, a sense of regret is palpable within our polity. It is no longer possible to hyphenate the development trajectories of India and China. At the turn of the century, an Indo-Chinese economic rivalry was widely postulated in global publications, and was celebrated at home. But this did not come to pass, triggering a deep and as yet unresolved angst. India did not manage to create corresponding levels of prosperity and well-being at the wide base of its socioeconomic pyramid, and its companies have been eclipsed in size by Chinese counterparts.
In the digital economy too, Chinese internet giants are far larger, despite our head start in information technology. Consequently, some policy practitioners have begun to advocate a China-like approach to digital economy regulation. That is, India should create firewalls to ring-fence the triad of data, technology and capital, just short of creating a Balkanized Indian internet. However, this is a reductionist proposition.
At the outset, glorification of China’s regulatory approach presupposes that tight control on the aforementioned triad has led to greater equity within its digital markets. This misplaced notion is often accompanied by a legitimate fear of ending up with a “winner takes all” digital economy. In reality, the Chinese markets are also dominated by a handful of companies. The only difference is that large Chinese companies such as Baidu, Alibaba and Tencent are home-grown. This monopoly formation stems from the internet’s universal network effect characteristic. This is particularly useful for digital advertising-led companies. This effect inverts the economic logic applicable to traditional industries by allowing increasing marginal returns.
To manage inevitable cases of abuse of market dominance by large internet companies, India should ideally strengthen its competition regulation capacity. Instead, it has done the opposite by merging the nodal competition appellate tribunal with a purely administrative tribunal under the ministry of corporate affairs.
Moreover, China has a large internal market that allows its companies to achieve scale and then seek longer-term sustenance outside. Consequently, 11 Chinese companies feature in the latest list of the largest 20 global internet companies. Indian companies cannot pursue the same strategy partly because our large middle-class market lacks purchasing power. To wit, despite accounting for 10% of total transactions, mobile wallets accounted for less than 1% of total transaction value in the previous fiscal. Similarly, internet companies looking to scale here find requisite transaction volumes, but struggle to generate value. In the absence of fiscal wherewithal to provide any monetary equivalent of Chinese state support, India cannot afford to cut off capital flows towards Indian internet companies.
Recent conversations on a proposed domestic e-commerce policy framework should also highlight a related challenge. Even if we create domestic e-commerce giants through retail industry protections, we will continue to sell Chinese products. The developmental benefits of this will be negligible. As many as 95% of registered manufacturing micro, small and medium industries in India are micro enterprises—household enterprises with less than five persons. They cannot possibly be expected to compete with sophisticated industrial supply chains. The mobile market is a ready example of this. Chinese imports dominate the Indian retail market despite a duty regime that is supposed to incentivise local production.
A central question is whether we want the Indian economy to constitute of retailers and resellers, or of producers. India’s only serious chance at creating a production base is by leveraging inward flows of finance and technology towards serving global value chains. To do this, India must assimilate new standards, create differentiated products and services, target niche markets, improve forward and backward supply chain linkages, and actualize policy reform. A robust digital market can help accomplish many of these objectives. For instance, India can become a large exporter of creative content through digital markets—ostensibly the reason why the government designated audio-visual services as a “champion sector” earlier this year. Conversely, restrictions on market access will only enable a handful of indigenous firms to create their own digital retail monopolies.
As far as data is concerned, India’s best chance at generating value through data flows is via enhanced market access. The global system that regulates this access is increasingly contingent on the principle of reciprocity. For instance, the European Union’s General Data Protection Rules and the US’ Clarifying Lawful Overseas Use of Data Act, have led to a wide consensus on the regulation of cross-border data flows. Both these approaches emphasize the role of trust and standards, which is consistent with the way such jurisdictions have approached market access issues more broadly.
India’s contribution to the evolving global discourse on digital economy regulations cannot be to reproduce the Chinese template. We must rise beyond a reductionism that only perpetuates panic and instead empower our entrepreneurs and firms to service global markets by deepening access to data, technology and capital.
India can become a large exporter of creative content through digital markets
Vivan Sharan is a partner at Koan Advisory Group, New Delhi.

"Overcoming Digital Divide", by Mohit Kalawatia for Daily Pioneer, 10th September 2018

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In 2014, the Narendra Modi-led Government came to power with an objective of ‘minimum Government, maximum governance, aimed at showcasing the country as an investment-friendly destination. Thereafter, on various occasions, the Government announced measures to boost private sector investment in the country. To its credit, several high-level policy decisions, like the Goods and Services Tax (GST) and Insolvency and Bankruptcy Code were enacted to improve the business and investment environment. However, the major test for the Modi-led Government is yet to come.
India is on the cusp of laying the foundation stone for the next digital revolution (Industry 4.0). Industry 4.0, synonymous with the digital economy, is expected to contribute one trillion dollar to national output by 2022-23. Given the undeniable potential of the digital economy to contribute outsize growth, it is incumbent on the Government to adopt a delicate, evidence-based approach to put in place an appropriate regulatory architecture that ensures the country reaps full dividends from Industry 4.0.
However, emergent policy recommendations in the past few weeks indicate that the Government is handling the nascent digital economy with a 20th century mindset. These include recommendations of the Committee of Experts, led by Justice (retd) BN Srikrishna, the draft e-commerce ‘policy’ and the draft report of the Working Group on Cloud Computing — the latter two, as reported by the media, amply illustrate the perils of a dated mindset.
For starters, the decision-making process of all the three have remained opaque and had negligible representation from private organisation, let alone investors. Therefore, the final outcome of these groups has been skewed towards one direction, while ignoring the consideration of other stakeholders, in particular investors. For instance, despite highlighting the economic cost and concomitant adverse impact on the start-up ecosystem associated with data localisation in a white paper, the final recommendation of the BN Srikrishna committee endorses the same. Similar provisions for localisation have found their way in Cloud computing recommendations as well as the draft e-commerce policy. It is important to note that storage of data in India would not mean access to that data by local entities. Additionally, such measures can exacerbate cyber-security risks by compelling enterprises to invest in increasing data storage capacity, while apportioning fewer resources to ensure adequate security controls.
Furthermore, voices for protectionism, which are reminiscent of the discourse during the 1991 reforms, are getting louder. Particularly with respect to the draft e-commerce policy, a document, which besides guiding India’s position at the international trade fora, is aimed at promoting the domestic e-commerce ecosystem. This policy will implicate all aspects of the digital economy, and have a key role to play in India’s preparation for the emergent digital revolution.
However, protectionist voices have argued that the Government should formulate different rules for foreign and domestic companies, citing that availability of abundant capital with foreign companies could kill domestic entrepreneurship.
India has come a long way from considering investments as a bail out to solve external payment crises, to recognising that investments bring with them growth and employment, and consequently make a significant contribution to the economy at large. Constant liberalisation of the foreign investment regime in the country is an example of this approach.
Nonetheless, while dealing with digital economy, a constant international best practice which is cited by protectionist voices is that of China. The question to ask is: Can India afford to adopt the Chinese approach? Currently, India’s share in global value chains (GVC) is estimated to be less than two per cent, while China’s share is in double digits. Importantly, China’s peculiar political and economic outlook makes its policies inimitable. For instance, most Chinese players in the digital economy have been supported by state-led investments.
Unlike China, India neither has the economic footprint to deter other countries from taking restrictive reciprocal measures, nor are our entrepreneurs and businesses supported by public sector finance. On the contrary, foreign capital has played a vital role in providing India’s home-grown digital companies like, Ola and Paytm, a global stage. Introducing onerous regulatory conditions and uncertainty could impact the trust of the investors in India as a promising and stable digital market, consequently damaging the image of the country as an investment-friendly destination.
Therefore, it is important that future policy-making is based on economic considerations and on evidence rather than myopic political considerations. Additionally, the need of the hour is to take a nuanced approach with respect to policies which are expected to impact India’s economic aspirations in the coming decade. Given that the 2019 Lok Sabha election are around the corner, the Modi Government will be under pressure to succumb to various protectionist demands. It should take care to avoid such pitfalls if it is to reap economic dividends in its second-term in power which it projects to win.
(The writer is Legal Associate, Koan Advisory Group)

Vivan Sharan speaks to NewsX on working hours in India, 21 August 2018

Vivan Sharan speaks to NewX on Ikea's first store in India, 20th August, 2018

" Reimagining fiduciaries in the digital economy", Vivan Sharan and Sidharth Deb, Live Mint, 15 August 2018

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The making of techno-commercial laws in India is often devoid of strong conceptual underpinnings. This is partly because the starting point for all legal drafting in the country is similar—we want to get the best of all worlds without any hint of compromise. Consequently, we end up with muddled outcomes that serve niche interest groups and confuse the rest. Additionally, as lawmakers pretend to be acutely attuned to local market realities, they also tend to characterize unclear outcomes as necessary instances of Indian exceptionalism. An aspirational India, with all its structural infirmities, often forgives them. However, the digital economy is less forgiving. Bad laws will be put to test and found wanting in much shorter feedback cycles.
In this context, much has been written about the draft Personal Data Protection Bill, 2018, and the accompanying explanatory report authored by the Justice Srikrishna Committee. To its credit, the committee has, prima facie, adopted a strong conceptual lens in both documents that seems to follow from the Supreme Court’s directions to ensure that individuals enjoy their informational privacy online. It has, therefore, proposed that the relationship between companies and individuals on the internet is akin to a fiduciary relationship. Users or consumers of internet services are called “data principals”, and data controllers or online businesses that provide such services have been deemed “data fiduciaries”. Although this seems like a robust point of departure for a framework determined to overcome the pitfalls of nebulous privacy policies, the conceptualization is riddled with several challenges which indicate that past mistakes are being repeated.
First, the framing of this intimate relationship between users and service providers was not part of wider stakeholder consultations. Unfortunately, this characterization of the relationship has a distinct irreversibility attached to it. Subsequent consultations, if any, are unlikely to revisit this central premise.
Second, the framing is also applied incorrectly. The committee borrows the concept from US constitutional scholar Jack Balkin’s work on “information fiduciaries”. According to this original theory, not all data controllers can be characterized as information fiduciaries. Only businesses with a wide scope of impact on society like social media companies, search engines and online transport aggregators, are classified as fiduciaries. Such a distinction feels intuitively correct, as common law equates fiduciary obligations with the highest standards of care. In contrast, the implication of the committee’s overbroad interpretation is that any business looking to scale digitally must invariably attract heightened fiduciary obligations.
Even if a reinterpretation of this concept is warranted under the premise of Indian exceptionalism, it should be explained. Instead, the Bill conveniently uses “data fiduciaries” as an umbrella term that has led to absurd outcomes. For instance, the Bill classifies all financial data as “sensitive personal data”. Sensitive personal data is the most intimate class of data associated with individuals in data protection laws globally. This is why 67 out of 68 countries studied by the Data Security Council of India do not categorize their financial data as “sensitive”. This is partly because such an interpretation can stymie innovation by restricting usage. In India’s case, financial innovation such as credit-scoring based on financial data can enhance key objectives like financial inclusion. Clearly, an overbroad conceptual underpinning has skewed important provisions.
In the committee’s defence, Balkin has himself proposed that countries can leverage his information fiduciary theory for law-making. The committee has taken this recommendation very seriously, at the expense of other recommendations. For instance, Balkin recommends a system wherein self-identified “information fiduciaries” can voluntarily accept greater responsibilities in exchange for economic incentives or legal benefits. For this, he proposes an approach akin to “safe-harbour” frameworks, which afford digital intermediaries fewer liabilities on complying with prescribed safeguards. India must begin to adopt similar nuance and flexibility in all techno-commercial frameworks, to provide an enabling environment for investments and growth.
Third, even if the fiduciary framework is conceptualized incorrectly, it stands to reason that the re-imagined concept must at least be applied consistently. In this connection, the committee’s normative push towards “data localization” warrants scrutiny. A natural corollary of the fiduciary obligation would be the expectation that businesses handle personal data in a manner which upholds basic security principles of confidentiality, integrity and availability. Towards this end, digital businesses tend to distribute data in disparate locations. This reduces concentration of risks in a single geography. However, with localization restrictions, cross-border data flows are artificially restricted, hampering such hedging operations. Therefore, in this case, the committee inadvertently undermines the fiduciary relationship and increases risk.
The committee also mandates exclusive localization of “critical personal data”, a class of data that is so strategic that the committee has left it to government to define. In a strange twist, this important data will in effect be made the most vulnerable to “single point of failure” risks that arise from concentration of data.
India’s new economy is hostage to old mindsets. The architects of our laws still value convenience over conviction and discretion over transparency. Some of this will change as consultations become more inclusive. But real change will only come with a fearless embrace of the future. For now, domestic consultations are reminiscent of global governance conversations, where India is often called in to complain once the conceptual basis for international rules are already established. It seems for the state, there is no irony in bringing this hypocrisy home.
Vivan Sharan and Sidharth Deb are technology policy experts based in New Delhi.

"Local Barriers to Global Ambition", by Vivan Sharan and Mohit Kalawatia, for CreativeFirst, 13 July 2018

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Recently, India celebrated the first anniversary of its Goods and Services Tax (GST) regime. The GST was introduced with the intention of eradicating a bevy of taxes, to achieve a ‘one nation, one market, one tax’ framework. However, as an exception, local bodies such as municipal corporations and panchayats were afforded the ability to impose additional taxes to harness local revenue streams. At the outset, this carve out seems fair, particularly since India’s local bodies struggle to remain solvent despite corporatisation. Public services are rarely charged at rates that can sustain their effective delivery – for instance, citizens pay negligible amounts for waste collection in most municipalities. Conversely, indirect taxes make for better optics in populist politics.

Coterminous with the implementation of the GST, states such as Tamil Nadu, Kerala, Maharashtra, and Punjab, had passed legislations authorising their local bodies to levy such taxes. Perhaps the most egregious departure from the intended outcome of a unified tax regime is Tamil Nadu’s Local Authorities Entertainment Tax Act, 2017.

First, it is a well-settled principle in Indian jurisprudence, that any legislative action must first pass the test of Article 14 under the Constitution, which mandates ‘equality before law’. One facet of such an obligation on legislative authorities is the responsibility to act in a manner that is not arbitrary. While state legislatures can implement “class legislations”, these should be based on reasonable classifications. This means that although a state can treat different set of people differently, such treatment should be based on intelligible differentia and not on artificial or whimsical grounds. That is, such classification must be based on clear constitutional principles like those relating to social welfare.

Conversely, classification solely on the basis of language, having no nexus with defined social welfare outcomes backed by empirical data, violate the spirit of Article 14. Classification on the basis of language has also been recognised as discriminatory by the Supreme Court in Aashirwad Films vs Union Of India & Ors (2007).

Second, whether intended or not, the imposition of differential tax rates on films is reminiscent of industrial policy rather than an optimal process of tax administration. Perhaps without intending to, the local body is indulging in picking winners. Lower taxes on Tamil films may lead to viewership that is based on acute price sensitivity of Indian consumers, rather than quality cinema. This in turn, may reduce the competitiveness of Tamil films in the long run by creating an artificial demand.

Such protections also tend to underprepare local industries to respond to technological change and shifts in consumer preferences. For instance, broadcasters across European countries with strong “cultural protections” such as in France are struggling to adapt to digital markets.

Luckily, Indian broadcasters, which do not have to adhere to analogous local content quotas, have had no trouble anticipating and responding to digital realities. Millions of Indians of all ages now subscribe to Video on Demand platforms, created or supported by local broadcasters.

Third, the notion of “competitive federalism” for the tax administrator has always been inconsistent with the academic imagination of the term. In the early days of e-retail many state governments and local bodies copied each other, presumed a loss in revenue from the changes in local supply chains, and imposed additional taxes as offsets. With the GST, many of these actions were rationalised, but outliers like Tamil Nadu can always perpetuate another race to the bottom. This form of federalism is also antithetical to the imperative of promoting cultural diversity. Why should residents of Tamil Nadu, including minority groups from other parts of the country, have differential access to films from other states? What if other states follow suit?

Fourth, discriminatory taxation on films based on language could have several unintended consequences for India’s political interests abroad. From Afghanistan to Canada, and even in remote areas such as Mongolia, Indian cinema has helped the country punch above its weight in geopolitics. This is a core element of India’s “soft power”, often described as the ability to co-opt rather than coerce. But, the quality of Indian cinema must keep pace with global demand in the 21st century – which is witnessing shifts owing to digitalisation. India’s coercive defence sector capabilities are often unable to keep pace with its global ambition. Therefore, it is even more important than ready avenues for enhancing soft power are not throttled by regressive incentives.

But local bodies, which often struggle to address more mundane challenges such as double entry bookkeeping, cannot be expected to act strategically in the larger national interest. The Union Government should therefore issue appropriate guidance, and conduct trainings for legislators on the construction of rational tax regimes. While doing so, it should also call for lower taxes on production and co-production of local content, to enable greater supply of quality Indian cinema to all markets – local, regional and global.

- Vivan Sharan is a Partner at Koan Advisory Group, where he steers advocacy efforts. He is also a Visiting Fellow at the Observer Research Foundation, and a Member of the National Committee on Media & Entertainment, constituted by the Confederation of Indian Industry.

- Mohit Kalawatia is an Associate at Koan Advisory Group. He is a legal professional, looking at digital payments, financial markets, and corporate governance issues for the firm.

"Towards an India e-commerce policy", by Vivan Sharan, for Live Mint on 26 June 2018

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The ministry of commerce is undertaking several rounds of consultations on an e-commerce policy framework for India. This is being done through a think tank constituted of “Indian” tech companies, relevant government bodies, industry associations, civil society and research institutions. The decision to constitute this think tank follows from both domestic and international compulsions. The domestic trigger is largely a fear of ceding the fast-growing e-commerce market to foreign interests, as exemplified by the rhetoric around the recent sale of Flipkart to Walmart. Simultaneously, India is under intense pressure to negotiate international rules on e-commerce under the World Trade Organization (WTO). Naturally, this think tank must carefully evaluate intersections between future domestic and international policy frameworks.
While the e-commerce think tank is ostensibly supposed to be of a multi-stakeholder format, some voices are louder and more prominently represented than others. Accompanied by the facts that the history of the Indian private sector’s policy demands from government is chequered with short-termism, and that policy research on the exigencies of the “new economy” is still in its infancy, the government has its task cut out.
To be fair, many within the government recognize that a sober and holistic assessment is required to balance domestic and international concerns, particularly since e-commerce is already shaping the new contours of international trade. For instance, e-commerce has featured in high-level discussions on each of the mega-free trade agreements, including the Regional Comprehensive Economic Partnership (RCEP) of which India is a part. India has resisted the inclusion of e-commerce in RCEP, a position backed by domestic mercantile lobbies. More importantly, the WTO also anticipated a high degree of global attention to e-commerce and established a related “work programme” in 1998. Despite its high stakes in the multilateral system and now also in digital markets, India has maintained a reticent stance even in this forum.
The WTO work programme covers different aspects of e-commerce not limited to e-retail. It examines issues arising from “the production, distribution, marketing, sale or delivery of goods and services by electronic means”, which is the de facto multilateral definition of e-commerce. India has only played a nominal role in the work programme, even though the discussions are consultative in nature. Perhaps limited engagement is a function of the lack of specialist capacity within government, which may partly be overcome through lateral entries. But this capacity building will take time. Meanwhile, Indian negotiators were caught completely off-guard at the 11th WTO ministerial conference last year. Over 70 countries advocated for formal introduction of e-commerce related issues into the Doha Round of negotiations, in a marked departure from disaggregated advocacy through the US and EU-led interest groups in the past.
In days when globalization worked in the favour of advanced countries, they favoured this system over all others. Today, countries such as the US are virtually abandoning multilateralism in favour of a reversion to exceptionalism and mercantilism. It is up to large developing economies such as India to sense and respond to the winds of change. The country must become a propositional leader in the multilateral sphere, rather than embracing inertia or negativity. This transition will require internal clarity on economic and political goals, with well-defined milestones to achieve them.
To begin with, the think tank should adopt an appropriate definitional framework for accommodating a broad vision of e-commerce. India’s operating definition of e-commerce derives from foreign direct investment policy, according to which: “e-commerce means buying and selling of goods and services, including digital products over digital and electronic network(s)”. This is a very narrow point of departure, envisioned only for e-retail through a “marketplace-based” model. And marketplaces are disallowed from influencing the price of goods or services. Consequently, it is possible to interpret that several services-driven e-commerce companies, such as those operating taxi-aggregation services, currently function in violation of policy. The extant definition also excludes data-driven internet companies which do not engage in front end transactions. A broader approach will help establish greater policy certainty which can drive economic growth.
The recommendations of the think tank should also uphold WTO principles such as “national treatment”, to preserve the larger multilateral ethos. Most bilateral investment treaties inked by India also include national treatment clauses, which prevent discrimination between foreign and domestic investments. The think tank could easily seek support for Indian companies, which no foreign entity could call out as discriminatory, such as asking for fiscal farsightedness within an accommodative tax policy or scientific research grants for the tech sector. Earlier in May, the Delhi high court refused to restrain international arbitration initiated by Vodafone and underlined that India should not invoke domestic law for its failure to perform international obligations. The think tank must therefore suggest ways that will insulate India from future international proceedings, and help the government signal that the country is open for business on fair and equitable terms.
Vivan Sharan is partner at Koan Advisory Group, New Delhi. These are his personal views.

Wednesday, June 20, 2018

"Looking Beyond Tactical Protectionism", Vivan Sharan for The Mint, 12 June 2018
In the run-up to the 2019 Lok Sabha elections, the protectionist din is growing louder in India. This is not unexpected, since, despite liberalization, we have not fully embraced an open-market identity. And despite our growing aspirations of becoming a stakeholder at the global economic high table, most political parties still seem to lack a cogent economic vision. Consequently, those in the protectionist camp have strengthened their attack on foreign companies, particularly on digital economy firms. Such companies are the softest targets, because they tend to lack the institutional experience, and sometimes even the will, to take political positions in emerging markets. However, in the spirit of debate, some rebuttals are in order.
Let us analyse the most common protectionist proposition first: that government should create different compliance burdens for foreign and Indian firms. This stems from the assumption that owing to superior technology and abundant capital, foreign-owned firms can easily outmanoeuvre domestic incumbents, if they compete on a level playing field. Therefore, like China, we should put strict conditions on foreign direct investment (FDI).
However, it makes no sense to allow, or even want, FDI, if we simultaneously want to put fetters on such capital. Industry can only prosper if we make clear choices, as evidenced in the case of telecom, the poster-child of India’s economic liberalization. In this industry, the extant national policy and licence conditions do not envision different requirements for foreign and Indian companies.
Moreover, India must account for a larger share of global value chains (GVCs), currently estimated to be only 2% of the total, before we can start selectively evoking the China model. We must harness inward investments to strategically generate this value. Many companies in the information technology (IT) and IT-enabled services space are now struggling to achieve this objective through outmoded cost-arbitrage-based business models. Ironically, some of them, unable to keep pace with innovation, are now asking for protection. This demand may be at the cost of the same market logic that created them—the ability to competitively serve global markets, with minimum government intervention.
A second, more compelling, proposition of the protectionist camp is that India should adopt a preferential approach towards strategic government procurements in the digital industries. Proponents of this approach are quick to cite examples such as the US government’s Defence Advanced Research Projects Agency (Darpa), which played a role in the invention of the modern internet. Darpa works closely with the US private sector, and, in doing so, promotes indigenous innovation. However, unlike Darpa, which is well-funded, with over ₹20,000 crore or so a year at its disposal, it is hard to name Indian government departments that have seen an increase in real expenditure over the last three decades.
In an effort to promote self-reliance, India has been trying to create preferential private sector partnerships in the defence industry for over a decade. Most recently, strategic partnerships were defined and envisioned under the defence procurement policy, 2016. However, this potentially meaningful modality of deep public-private partnerships has been throttled by reticence on part of the unions representing public sector enterprises, as well as an all-pervasive lack of trust in the private sector. These are challenges within government. The solutions cannot possibly lie outside, or in the politics of protectionism.
Lastly, the newest avatar of protectionism is manifesting itself in the so-called “data economy”, the data-driven subset of the digital economy. A legitimate hypothesis is that as India transitions from data-poor to data-rich, owing to factors such as increased internet penetration and the Jan Dhan-Aadhaar-Mobile (JAM) trinity, the data-linked rights of citizens must be secured better. However, the protectionist camp goes on to offer a tenuous extension of this hypothesis: India should mandate localization of all data owned by foreign companies, again inspired by China.
There are several technical arguments in favour of cross-border data flows, but let us forget those. The central issue is that, analogous to the case for enhancing contribution to GVCs for goods and services, India will have to service global data flows if it is to become a hub for data-driven industries.
Despite large volumes, the potential for earning large value from the domestic data market remains limited. Low average revenues per user in telecom and low transaction values in digital payments are indicative of this “high-volume and low-value” paradigm. The need for data services to achieve scale is almost a prerequisite to their survival.
Unlike China, we do not have a large enough economic footprint to deter advanced countries from taking reciprocal measures against our “tactical protectionism”. And unlike in the US, our institutions and businesses do not generate enough surpluses to invest in cutting-edge research. Our markets are shallow, and our technological self-reliance has to be earned through internal reform. So, if we are to be protectionist, we must at least adopt a strategic lens—investments cannot be turned away for meeting political ends.
Vivan Sharan is a partner at Koan Advisory Group, New Delhi. The views expressed are personal. Comments are welcome at

"Now to Make Sense in India", Vivan Sharan and Samir Saran for the Economic Times, 30 March 2018
India currently faces multiple headwinds to industrial growth. These include muted private investment, protectionism emanating from OECD countries, and growing automation within production supply chains. In this context, GoI has done well to signal positive intent and political will to keep the economic engine churning by improving the business environment.
Commerce minister Suresh Prabhu’s revitalisation of the commerce agenda exemplifies this constructive approach.
India’s institutions, with their capacity deficits and coordination failures, require precisely this form of hands-on leadership where the prohibitive barriers posed by the need for inter-ministerial coordination are absent.
One area that fits squarely within the commerce ministry’s domain is FDI policy, a low-hanging fruit for Prabhu. The caveat is that some sector-specific FDI policies are jeopardised by legacy policy positions of other line ministries. Nevertheless, a large share of FDI in recent years has accrued to the services sector.
India’s economic growth seems increasingly contingent on a policy environment that supports investments at critical intersections of global value chains (GVCs) — such as services that add value to manufacturing, or those that facilitate better access to international markets.
All of this necessarily means more consultative reforms, and less idiosyncratic bureaucracy. The Single Brand Retail Trading (SBRT) policy announced earlier this year is the most visible example of the dissonance between 21st-century goals and a20th-century mindset. While this policy allows 100% FDI into singlebrand retail through the automatic route (the earlier limit was 49%), it falters on nuance.
For example, the erstwhile policy had prescribed that 30% of goods purchased by the retailer receiving FDI must be sourced domestically. While promoting local companies is a laudable goal, the means to achieve this was flawed. Little interest in new investment or manufacturing was generated.
Consequently, the Department of Industrial Policy and Promotion allowed retailers to offset local sourcing norms through exports. This step allows brands retailing their own products to source locally from India and integrate with GVCs. There’s just one glitch: the policy allows this only for an arbitrary period of five years.
Why switch to domestic procurement after five years? Why not promote manufacturing-linked exports as a specific category to offset domestic procurement requirements?
Bureaucrats, in all their wisdom, have also introduced a concept of ‘incremental sourcing’, which is impossible to interpret. It suggests that the percentage of sourcing in every year will be entirely discounted in the following year. So, companies would have to grow exponentially every year just to keep up with the exports-equivalent of the sourcing requirement. More importantly, this would automatically disqualify any company that intends to invest in new facilities and begin operations at full capacity.
Why treat value-added activity the same as trading? Further, incremental sourcing may work with one sector, and not with another. This is another failure to appreciate nuance. Perhaps there is an ex ante expectation that retail brands will not make large manufacturing investments (as they would have to start operations at scale, and not incrementally). This is a flawed expectation.
The logic behind allowing FDI in SBRT is to create the right incentives for domestic manufacturing, not the conditions for policy arbitrage by firms only interested in some form of trading. There is an opportunity here to signal a preference and strategic coherence. Companies should be encouraged to make in India, and export to the world.
The policy also restricts offsetting through entities that are not directly related, or a part of, the group companies that have received FDI. Nearly all global corporations work through agents and franchisees to complete specialised functions, such as manufacturing, retailing and exports.
GVCs are replete with examples of exceptionally sophisticated, multientity supply chains. So, the fear of policy misuse should be addressed through appropriate indemnifications and penalties in case of breach, rather than guidance on how to structure compliance.
Also, the policy ostensibly links the prospects of e-commerce retail to the opening of brick-and-mortar stores first, contradicting the very basis of GoI’s ‘Digital India’ programme. Investing in online business should be encouraged, not delayed.
Prabhu expects India’s GDP to touch $5 trillion within a decade. He expects asignificant share of this growth to come from efficiencies born of better logistics and digitisation. He intends to leverage India’s growing internal market, pool of tech-savvy workers and rapid digitalisation, towards enhanced integration into GVCs. Bureaucrats in the commerce ministry would do well to support this vision. And they can begin with fixing extant FDI policies.
**Saran and Sharan are vice-president and visiting fellow, respectively, Observer Research Foundation, New Delhi.

Vivan Sharan speaks to NewsX on the Cambridge Analytica Controversy, 22 March 2018

"The future of the Indian workforce: A new approach for the new economy", Occasional Paper for the Observer Research Foundation, 21 March 2018

India is at a crossroads. It has the largest young workforce anywhere in the world, and is the fastest growing economy today. At the same time, the economy is not creating enough jobs, and therefore not fully harnessing its “demographic dividend” in preparation for the “Fourth Industrial Revolution”. To create more and better jobs, certain fundamental realities need to be recognised – the untapped opportunities in the services sector, the imperatives of policy and regulatory stability, and the welfare needs of a new workforce. After briefly analysing the supply-side context (the characteristics of the so-called “demographic dividend”), this paper outlines a basic strategic roadmap for the demand side with a focus on constituents of the new economy (the industries that will have to generate new employment). It concludes with recommendations that can help bridge supply-side gaps, and demand-side imperatives.

Rise of Competition Jurisprudence, Vivan Sharan and Mohit Kalawatia write for The Pioneer, 01 March 2018

The increasing prominence of large online businesses has made competing authorities around the world devote more time in the ‘new economy’, characterised by rapid-scale innovation. In this context, the Competition Commission of India’s (CCI) decision in the recently resolved case on Google, throws light on the approach likely to be followed by our anti-trust regulator going forward.
The CCI, in its order dated February 8, 2018,  imposed a Rs 1.3 billion fine on Google for abusing its dominant position in ‘online general web search’, and the ‘online advertising search’ markets.
Special characteristics of the Internet economy, and the methodology to determine the existence of dominant position, are important points of departure before abuse of dominance is established as it was in the Google case.
Many online businesses seem to follow a counter-intuitive business model, and often make big sums of money without selling anything to the retail user; and even though there are fewer barriers to online distribution, then there are offline, such companies can still dominate online markets by capturing consumers within their expansive ecosystems.
Special characteristics: It is said that in the new Internet economy, where many products (and services) are made available for free, consumers are often themselves the product. In this respect, the CCI judgement echoes Prime Minister Narendra Modi’s remark at Davos, that “business models based on collection and processing of data will shape the world”, and it further opines that even though Google provides its search services for free, users offer indirect consideration to the company by allowing it to collect and use their information; consequently facilitating generation of advertising revenues.
The CCI also acknowledges the impact of ‘network effects’ on online businesses. That is, a user’s benefit from a product or service increases with the number of other users within the network — consequently opening new avenues for market dominance. Such effects are particularly important in two-sided markets where users on each side of the market derive benefits from the expansion of users on the other side.
For example, commuters, who use radio-taxi platforms, will be more attracted to a platform which has a larger driver network, and therefore, lower waiting time for users. Specifically,  the CCI points out that anti-trust assessments relying solely on the provision of ‘free’ services to one side of the market, may fail to see the complete picture.
The presence of network casts special responsibility on businesses which have a dominant position in online market. Simultaneously, it is important that the CCI continues to draw a distinction between the inherent nature of competition in a network industry, on account of the structural features of the market in question, and a situation wherein a firm adopts exclusionary practices to abuse its dominant market position.
To be clear, dominance in and of itself is not a sin and is not penalised by any statute, only its abuse is.
Determining abuse: The CCI normally commences its inquiries by delineating a ‘relevant market’. Notably, there has been a dichotomy in CCI’s approach while ascertaining relevant markets in the new economy. For instance, in the context of e-commerce related judgements, the CCI has previously adopted a wide approach and described online and offline markets as constituents of the same market. In contrast, for the Google case, it adopted a narrower approach, distinguishing online and offline markets.
Given that there are often several intersections between online and offline businesses, the CCI may be tempted to maintain such subjectivity going forward. In an ideal world, a clear direction of competition jurisprudence would serve as guidance to market participants.
After delineating a relevant market, the next step to determine abuse involves ascertaining market dominance. In this context, competition law prescribes that the CCI should consider factors like market share, size and resources of the firm in question, size and importance of competitors, vertical integration of the service network and entry barriers. However, in practice, the CCI gives asymmetric importance to market share as an indicator of dominance, as also evidenced by the investigations on Google.
An overall inability to ascertain market structure has served as an analytical limitation to CCI investigations in the past (for instance on predatory pricing). This approach may need some reimaginin  as it fails to take into account that the Internet economy is characterised by short innovation cycles and, therefore, large market shares may often be ephemeral.
 Conversely, aspects such as vertical integration may need more attention, given that dominance is also a function of how ‘fairly’ an online business is able to capture and control its users.
In the age of big data and artificial intelligence, it is reasonable to expect that businesses with large data sets and computing power will integrate with specialised services and create a new paradigm of dominance wherein it would be very hard for new market entrants to ever usurp their edge.
Regulating competition without stifling the nascent Internet economy in India will no doubt be a tightrope walk for the CCI. For instance, an overly narrow approach for determining relevant markets can kill innovation and too wide an approach can stifle competition. Both will have adverse impacts on consumer welfare.
Similarly, vertical integration and provision of bundled or stacked services, already veil real instances of abuse globally.
While jurisprudence from foreign shores can offer some limited insights as a regulator that is central to the sustainable growth of India’s new economy — where politicians tend to look for our economic salvation, the CCI has the opportunity to craft an exceptionally nuanced and transparent approach. Towards this, more market insights and rigorous economic analyses must necessarily accompany our competition jurisprudence.
The CCI must build internal capacity and find ways to proactively and dynamically engage with industry and civil society experts on new questions concerning the new economy.
(Vivan Sharan and Mohit Kalawatia are technology policy experts. Views expressed are personal)

Wednesday, January 31, 2018

Vivan Sharan and Sidharth Deb write on "Maintain the Integrity of India's Telecom Ecosystem", in DailyPioneer, on 22 January 2018

Last week, the New York Times reported that telecom behemoth AT&T caved in to pressure from US authorities to rescind its agreement with Huawei Technologies to distribute its ‘Mate 10’ smartphone. The move stems from concerns voiced by US lawmakers to the Federal Communications Commission, pertaining to Huawei’s role in supporting Chinese cyber espionage activities. This situation has consequences for India, a market where Huawei is among the dominant telecom equipment suppliers already, and where it seeks to build its smartphone business.
Reports suggest that Washington is urging AT&T to end commercial ties with Huawei, and is also considering ways to halt Chinese telecom operator, China Mobile Ltd, from entering the American market. Further, Republican lawmakers have also introduced a Bill, which could bar the US Government from contracting or utilising Huawei and ZTE — another Chinese telecom firm — owing to national security threats. This is not the first time the US has acted on such threats. In 2012, the US House of Representatives commissioned an investigation into national security threats faced from both Huawei and ZTE — particularly threats posed to the resilience of critical information infrastructures.
From an Indian perspective, these developments mirror domestic security concerns and implicate flagship development schemes like ‘digital India’. Huawei has also placed bids with the Indian Government for infrastructure projects for the ‘Smart Cities’ initiative, and sells about one million phones locally under its ‘honor’ brand, annually. Enabling policy and market conditions have allowed India to generate over 1.2 billion mobile phone connections and it is consequently the second largest smartphone market in the world, with over 300 million devices. However, for such a massive digitalisation drive to be sustainable in the long term, ecosystem integrity in the telecom sector is a prerequisite.
Indian decision-makers must remain mindful of the dominance of Chinese firms in India’s smartphone and network equipment markets. For instance, by the first quarter of last year, such firms had already captured more than half of India’s smartphone market. Similarly, security experts have previously voiced concern that over 60 per cent of software and hardware utilised for telecom, including what is used by BSNL, is sourced from either Huawei or ZTE. These concerns are compounded by the fact that in 2014, Huawei had been probed for allegedly compromising BSNL’s network. In 2010, a comprehensive joint report by the Information Warfare Monitor and the Shadow Server Foundation found that Chinese cyber espionage activities (similar to subsequent US concerns) have systemically compromised critical networks in India. Evidently then, instances of cyber security threats originating from China are not new for India.
More recently, the Indian Air Force has also been reacting to national security threats posed by Chinese smartphones. For instance, in the wake of findings made by security solutions firm F-Secure, revealing that Xiaomi phones relay sensitive user information to servers in China, Air Force personnel were advised not to use the company’s products. China’s State Security Law explicitly allows any state organ of the Chinese Government to access any electronic communications or related data, stored by companies that are headquartered within its borders. Further, it has also emerged that both Xiaomi and major smartphone brand One Plus devices have been found to contain pre-installed backdoors which make their devices vulnerable to hacking. One Plus has also been found to collect sensitive user information, including IMEI numbers, phone numbers and names of mobile network operators, without prior informed consent — contravening accepted data collection and processing norms.
The (in)security of India’s smartphone ecosystem came up at the highest levels of Government and law enforcement last year. In the context of data security, the nodal Computer Emergency Response Team ie  CERT-In, directed 21 smartphone manufacturers, mostly Chinese, to furnish details with respect to security practices, frameworks, standards and processes, followed by the concerned enterprises. Moreover, in the wake of the border standoff at Doklam, the Ministry of Defence advised military personnel to uninstall and remove around 42 mobile applications (predominantly Chinese), classifying them as spyware.
Most advanced jurisdictions are dealing with such threats through appropriate standard setting and testing procedures. Similarly, India’s Ministry of Communications released a notification in September last year, mandating prior testing and certification of equipment for telecom networks. However, these rules shall only become enforceable in October 2018, by which time, Chinese dominance of telecom supply chains will only be reinforced.
Emergent security requirements should reflect international standards designed by expert organisations like the ISO, IEC, IETF, and IEEE. Unfortunately, India’s participation at such standard development organisations, especially in the context of network and information security, remains less than desirable. Given that Chinese industry is actively influencing standard setting conversations, as observed with Huawei’s attempted agreements with AT&T, to develop 5G network standards, it becomes imperative that India targets strategic capacity-building on this front, along with industry counterparts from friendly countries. International summits, such as the one in Davos, should be treated as opportunities to build requisite relationships in this regard.
Most importantly, India lacks testing processes to ensure that smartphone devices adhere to cybersecurity standards. The current testing and certification framework under the Ministry of Electronics and Information Technology’s ‘Compulsory Registration Order’, only envisions phone safety through the prism of generic safety requirements, like fire, heat and chemical hazard testing. This void, if not mitigated at the earliest, poses a grave threat and amplifies opportunities for bad actors, either state or non-state, to disrupt India’s communications channels and potentially compromise data privacy. Recent reports suggest that the Government has recognised this gaping hole in current policy and is actively developing cyber security standards for mobile devices to be published for consultations this year. Reports also suggest that the Ministry of Home Affairs is developing a Cyber-Forensics Lab to help secure digital ecosystems.
While designing standards and testing requirements, India can learn from the approaches taken by other members of the international community. For instance, jurisdictions like the UK and Singapore, develop device and application cybersecurity standards using principles of Security-by-Design (updated throughout product lifecycles). More specifically, testing benchmarks tend to be based on international computer security certification standards developed by the ISO and IEC, namely the Common Criteria for Information Technology Security Evaluation. Further, in order to ensure robustness of such processes, both these countries have embraced working arrangements with security experts.
India must follow an inclusive and strategic approach to protect its telecom ecosystem, without compromising on the growth of markets, or the enthusiasm for flagship schemes which can give impetus to private investments. Indian law enforcement agencies are already used to working with non-government institutions and external experts and, therefore, there is a template available for a dynamic private-public partnership approach to cyber security. However, a formal and inclusive feedback loop is also needed for facilitating information exchange, confidence building with industry, and strengthening institutional capacities. To this end, India would do well to borrow from experiences of friendly countries rather than reinventing the wheel.
(The writers are technology policy consultants at Koan Advisory Group, New Delhi. Views expressed are personnel)