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)