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 email@example.com